3. Shareholders’ Equity and Related Party Transactions

The Company issues options to purchase common stock to its employees, certain consultants, and certain of its board members. Options are generally granted with an exercise price equal to the closing market value of a common share at the date of grant, have five- to ten-year terms and typically vest over periods ranging from immediately to three years from the date of grant. There are 1,105,000 authorized shares remaining for granting of future options.

In calculating compensation related to stock option grants, the fair value of each stock option is estimated on the date of grant using the Black-Scholes option-pricing model and the following weighted average assumptions:

	2011	2010

Dividend yield	None	None
Expected volatility	128.60%	134.30%
Expected annual forfeiture rate	10%	10%
Risk-free interest rate	1.10%	1.50%
Expected term (years)	4	4

The computation of expected volatility used in the Black-Scholes option-pricing model is based on the historical volatility of our share price. The expected term is estimated based on a review of historical exercise behavior with respect to option grants.

The estimated fair value of equity-based awards, less expected forfeitures, is amortized over the award’s vesting period on a straight-line, generally over three years. Share-based compensation expense recognized in the statements of operations for the nine months ended June 30, 2011 and 2010 related to common stock option grants was $22,200 and $45,000 (fair value of $0.52 and $1.24 per share), respectively. There was no share-based compensation expense recognized during the quarter ended June 30, 2011 and 2010.

During the nine months ended June 30, 2011, the Company raised $425,000 through ten private placements to the Company’s president, chairman of the board, and one other board member, as detailed below:

	# of Shares	Amount

To chairman of the board, November 9, 2010	62,500	$ 50,000
To president, December 6, 2010	83,333	50,000
To chairman of the board, December 9, 2010	75,758	50,000
To president, December 27, 2010	39,062	25,000
To president, January 13, 2011	64,935	50,000
To president, January 27, 2011	60,241	50,000
To board member, January 31, 2011	27,778	25,000
To chairman of the board, February 7, 2011	64,935	50,000
To chairman of the board, April 11, 2011	106,383	50,000
To board member, April 29, 2011	33,333	25,000
	618,258	$ 425,000

These shares have not been registered with the SEC. However, the Company’s president, chairman of the board, and additional board member received demand registration rights, subject to certain limitations, and unlimited piggyback registration rights, with respect to the shares. The Company is only obligated to use its best efforts to obtain an effective registration statement.