NOTE G - STOCK OPTIONS AND WARRANTS

Warrants

The following table summarizes the changes in warrants outstanding and the related prices for the shares of the Company’s common stock issued to non-employees of the Company. These warrants were granted in lieu of cash compensation for services performed or financing expenses in connection with the sale of the Company’s common stock.

				Warrants
				Outstanding		Weighted				Exercisable
				Remaining		Average		Weighted		Weighted
Exercise		Number		Contractual		Exercise		Average		Average
Prices		Outstanding		Life (Years)		Price		Exercisable		Exercise Price
$	0.03088		2,428,756		6.42	$	0.3088		2,428,756	$	0.3088
$	0.03283		533,116		6.39	$	0.3283		533,116	$	0.3283
$	0.04		9,000,000		4.17	$	0.04		3,000,000	$	0.04
$	0.04405		3,007,946		6.05	$	0.04405		3,007,946	$	0.04405
$	0.05529		1,356,484		6.53	$	0.05529		1,356,484	$	0.05529
$	0.06		12,000,000		3.63	$	0.06		7,000,000	$	0.06
$	0.07		200,000		0.71	$	0.07		200,000	$	0.07
$	0.09		16,400,000		0.17	$	0.09		16,400,000	$	0.09
$	0.10		1,500,000		1.74	$	0.10		1,500,000	$	0.10
$	0.50		10,700,000		1.49	$	0.50		10,700,000	$	0.50
			57,126,302						46,126,302

Transactions involving warrants are summarized as follows:

	Number of Shares			Weighted Average Price Per Share
Balance, September 30, 2009		64,820,500		$	0.43
Granted		22,007,946			0.05
Exercised		—
Canceled or expired		(17,620,500	)		(0.73	)
Balance at September 30, 2010		69,207,946		$	0.24
Granted		4,318,356			0.04
Exercised		—			—
Canceled or expired		(16,400,000	)		(0.50	)
Balance, June 30, 2011		57,126,302		$	0.15

On April 29, 2010, warrants totaling 10,000,000 were issued in connection with services. The warrants are exercisable for five years from the date of issuance at an exercise price of $0.06 per share with 25% vesting immediately, 25% on October 29, 2010, 25% on April 29, 2011 and 25% on October 29, 2011. The fair value of the warrants vesting during the nine month period ended June 30, 2011 was determined using the Black-Scholes Option Pricing Model with the following assumptions: dividend yield $-0-, volatility of 170.72% and risk free rate from 1.17%.

The determined fair value of $93,580 is charged ratably to current period operations. During the three and nine month periods ended June 30, 2011, $14,911 and $93,580 was charged to operations, respectively.

On July 15, 2010, warrants totaling 3,007,946 were issued in connection with services provided in connection with the issuance of convertible notes. The warrants are exercisable for seven years from the date of issuance at an exercise price of $0.04405 per share. The fair values of the warrants were determined using the Black-Scholes Option Pricing Model with the following assumptions: dividend yield $-0-, volatility of 173.55% and risk free rate from 2.43%.

The determined fair value of $174,429 is charged ratably to current period operations over one year. During the three and nine month periods ended June 30, 2011, $43,607 and $130,821 was charged to operations, respectively.

On August 30, 2010, warrants totaling 10,000,000 were issued in connection with services. The warrants are exercisable for five years from the date of issuance at an exercise price of $0.04 per share with 33% vesting immediately and 67% upon achieving defined milestones. The fair value of the vested warrants was determined using the Black-Scholes Option Pricing Model with the following assumptions: dividend yield $-0-, volatility of 173.24% and risk free rate from 1.39%.

The determined fair value of $113,885 is charged ratably to current period operations. During the three and nine month periods ended June 30, 2011, $28,393 and $84,867 was charged to operations, respectively.

In the month of November 2010, warrants totaling 2,961,872 were issued in connection with services provided in connection with the issuance of convertible notes. The warrants are exercisable for seven years from the date of issuance at exercise prices from $0.03088 to $0.03283 per share. The fair value of the warrants were determined using the Black-Scholes Option Pricing Model with the following assumptions: dividend yield $-0-, volatility of 169.06% to 169.21% and risk free rate from 2.16 to 2.20%.

The determined fair value of $120,840 is charged ratably to current period operations over one year. During the three and nine month periods ended June 30, 2011, $30,210 and $71,779 was charged to operations, respectively.

In the month of January 2011, warrants totaling 1,356,484 were issued in connection with services provided in connection with the issuance of convertible notes. The warrants are exercisable for seven years from the date of issuance at exercise price of $0.05529 per share. The fair values of the warrants were determined using the Black-Scholes Option Pricing Model with the following assumptions: dividend yield $-0-, volatility of 170.33% and risk free rate of 2.69%.

The determined fair value of $97,131 is charged ratably to current period operations over one year. During the three and nine month periods ended June 30, 2011, $24,283 and $46,370 was charged to operations, respectively.

Employee Stock Options

On January 26, 2005, the Board of Directors, and on February 15, 2005, the holders of a majority of the outstanding shares of common stock of the Company approved the 2005 Incentive Stock Plan and authorized the issuance of 16,000,000 shares of common stock as stock awards and stock options thereunder. On May 16, 2007, at the annual meeting of stockholders, the holders of a majority of the outstanding shares of common stock of the Company approved an increase in the number of shares subject to the 2005 Incentive Stock Plan to 20,000,000 shares of common stock. On June 17, 2008, the Board of Directors unanimously adopted an amendment to the 2005 Incentive Stock Plan that increased the total number of shares of common stock issuable pursuant to the 2005 Incentive Stock Plan from a total of 20,000,000 shares to a total of 100,000,000 shares, which was approved by our stockholders at the 2008 annual meeting of stockholders held on December 16, 2008. In connection with the share increase amendment, the Board of Directors granted and we issued options to purchase a total of 37,670,000 shares at an exercise price of $0.11 to certain key employees and non-employee directors under the 2005 Incentive Stock Plan, including 17,000,000, 5,000,000 and 7,000,000 to James A. Hayward, Kurt H. Jensen and Ming-Hwa Liang, respectively. The options granted to our key employees and non-employee directors vested with respect to 25% of the underlying shares on the date of grant and the remaining vest ratably each anniversary thereafter until fully vested on the third anniversary of the date of grant.

On May 27, 2010, the our named executive officers elected to forfeit certain stock options to purchase up to 29 million shares of our Common Stock at an exercise price of $0.11 that were previously granted to them under the 2005 Incentive Stock Plan. In lieu of the forfeited options, our Board of Directors granted new stock options to such named executive officers to purchase up to 29 million shares of our common stock at an exercise price of $0.05 under the 2005 Stock Incentive Plan which are fully vested and became exercisable on June 29, 2010 following approval by our stockholders to amend our certificate of incorporation to increase our authorized shares of common stock.

On July 1, 2010, our Board of Directors granted nonstatutory stock options under the 2005 Incentive Stock Plan to our named executive officers. The options granted to the named executive officers vested with respect to 25% of the underlying shares on the date of grant, and the remaining will vest ratably each anniversary thereafter until fully vested on the third anniversary of the date of grant.

The 2005 Incentive Stock Plan is designed to retain directors, executives, and selected employees and consultants by rewarding them for making contributions to our success with an award of options to purchase shares of our common stock. As of June 30, 2011, a total of 9,675,000 shares have been issued and options to purchase 70,400,000 shares have been granted under the 2005 Incentive Stock Plan.

The following table summarizes the changes in options outstanding and the related prices for the shares of the Company’s common stock issued to employees of the Company under the 2005 Incentive Stock Plan:

	Options Outstanding					Options Exercisable
Exercise Prices		Number Outstanding		Weighted Average Remaining Contractual Life (Years)		Weighted Average Exercise Price		Number Exercisable		Weighted Average Exercise Price
$	0.05		29,000,000		1.97	$	0.05		29,000,000	$	0.05
$	0.06		30,000,000		4.01	$	0.06		7,500,000	$	0.06
$	0.07		2,500,000		4.46	$	0.07		500,000	$	0.07
$	0.08		2,000,000		4.52	$			-	$	-
$	0.09		1,500,000		0.17	$	0.09		1,500,000	$	0.09
$	0.11		5,400,000		1.97	$	0.11		4,050,000	$	0.11
			70,400,000			$	0.06		42,550,000	$	0.06

Transactions involving stock options issued to employees are summarized as follows:

	Number of Shares			Weighted Average Exercise Price Per Share
Outstanding at October 1, 2009		38,920,000		$	0.11
Granted		59,000,000			0.06
Exercised		-
Cancelled or expired		(31,020,000	)		(0.11	)
Outstanding at September 30, 2010		66,900,000		$	0.06
Granted		3,500,000			0.08
Exercised		-
Canceled or expired		-
Outstanding at June 30, 2011		70,400,000		$	0.06

On January 4, 2011, the Company granted 2,000,000 options to purchase the Company’s common stock at an exercise price of $0.08 per share for five years to an employee with vesting at 25% each anniversary for the next four years. The fair value of options was determined using the Black-Scholes Option Pricing Model with the following assumptions: dividend yield $-0-, volatility of 170.62% and risk free rate from 2.01%.

The Company recorded $154,499 and $459,968 as stock compensation expense for the three and nine month periods ended June 30, 2011, respectively, and $1,382,248 and $1,969,483 for the three and nine month periods ended June 30, 2010, respectively, for the vesting portion of all employee options outstanding.