Stock Options

9 Months Ended

Sep. 30, 2012

Notes to Financial Statements

Note 9. Stock Options

Stock Option Program Description

As of September 30, 2012, the Company had two equity compensation plans, the 1996 Stock Option Plan (the “1996 Plan”) and the 2006 equity compensation plan (the “2006 Plan”). The 1996 Plan has expired for the purposes of issuing new grants. However, the 1996 Plan will continue to govern awards previously granted under that plan. The 2006 Plan has been approved by the Company’s shareholders. Equity compensation grants are designed to reward employees and executives for their long term contributions to the Company and to provide incentives for them to remain with the Company. The number and frequency of equity compensation grants are based on competitive practices, operating results of the company, and government regulations.

The 2006 Plan has a total of 3,000,000 shares reserved for issuance, of which 2,091,000 shares were available for grant as of September 30, 2012. All stock options have terms of between three and ten years and generally vest and become fully exercisable from one to three years from the date of grant or vest according to the price performance of our shares.

As of September 30, 2012, the total compensation cost related to non-vested awards not yet recognized is $21,000. The weighted average period over which the future compensation cost is expected to be recognized is 12 months.

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

		Number of Share Options			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term in Years		Aggregate Intrinsic Value(1)
Outstanding at December 31, 2011			2,529,000		$	1.07		6.09	$	—
Granted			270,000		$	0.08		—	$	—
Exercised			—		$	—		—	$	—
Forfeited or Cancelled			(1,969,000	)	$	1.08		—	$	—
Outstanding at September 30, 2012			830,000		$	0.73		4.22	$	10,000
Exercisable at September 30, 2012			568,000		$	1.01		4.49	$	1,000
Vested and expected to vest (2)			830,000		$	0.73		5.80	$	—
(1)	Aggregate intrinsic value represents the value of the closing price per share of our common stock on the last trading day of the fiscal period in excess of the exercise price multiplied by the number of options outstanding or exercisable, except for the “Exercised” line, which uses the closing price on the date exercised.
(2)	Number of shares includes options vested and those expected to vest net of estimated forfeitures.

      The exercise prices of the options outstanding at September 30, 2012 ranged from $0.07 to $4.35. The weighted average grant-date fair value of options granted during the nine months ended September 30, 2012 and 2011 were $0.05 and $0.79, respectively. The Company’s policy is to issue shares from its authorized shares upon the exercise of stock options.

Unvested share activity for the nine months ended September 30, 2012 is summarized below:

	Unvested Number of Options			Weighted Average Grant Date Fair Value
Unvested balance at December 31, 2011		1,403,000		$	0.26
Granted		270,000		$	0.05
Vested		(892,000	)	$	0.19
Forfeited		(519,000	)	$	0.29
Unvested balance at September 30, 2012		262,000		$	0.05

The fair values of all stock options granted during the nine months ended September 30, 2012 and 2011 were estimated on the date of grant using the Black-Scholes option-pricing model with the following range of assumptions:

	For the nine months ended
	September 30, 2012			September 30, 2011
Expected life (in years)		1.5 - 6.5		2.5 – 6.5
Average risk-free interest rate		1.66	%		2.00	%
Expected volatility		108 – 136	%		107 - 132	%
Expected dividend yield		0	%		0	%
Forfeiture rate		3	%		3	%

The estimated fair value of grants of stock options to nonemployees of the Company is charged to expense in the financial statements. These options vest in the same manner as the employee options granted under each of the option plans as described above.