20. OPTION PLAN AND WARRANTS

Share-based compensation amounted to $36,182 and $11,882, respectively, in the three months ended July 31, 2011 and 2010, and $96,981 and $25,815 in the nine months ended July 31, 2011 and 2010.

(1) 2003 Omnibus Plan

On February 28, 2003, our board of directors approved the Renhuang Pharmaceuticals, Inc. 2003 Omnibus Securities Plan (the “2003 Plan”), which was approved by our shareholders on April 11, 2003. The 2003 Plan offers selected employees, directors and consultants an opportunity to acquire our common stock, and serves to encourage such persons to remain employed by us and to attract new employees. The 2003 Plan allows for the award of stock and options, up to 25,000 (after giving effect to the 1-for-30 reverse stock split in 2006) shares of our common stock. On May 1, of each year, the number of shares in the 2003 Securities Plan is automatically adjusted to an amount equal to ten percent of our outstanding stock on July 31, of the immediately preceding year. As of July 31, 2011, the number of shares of common stock outstanding was 37,239,536 making 3,723,954 shares of common stock subject to the 2003 Plan.

a) On April 13, 2010, an option to purchase 70,000 shares was granted under the 2003 Plan to an independent director that vests on a quarterly basis beginning three months from the date of grant, conditioned upon continued service on such quarterly dates, and has a contractual life of 3 years. The fair value of the option award is estimated on the date of grant using the Black-Scholes option valuation model to be $171,397, of which $14,283 and $42,849 were recorded as compensation expenses for the three and nine months ended July 31, 2011 and $14,283 and 16,944 were recorded for the three and nine months ended July 31, 2010. The valuation was based on the assumptions noted in the following table.

Expected volatility		227.9	%
Expected dividends
Expected term (in years)	3 years
Risk-free rate		1.65	%

The risk-free interest rate is based on the U.S. Treasury yield curve in effect for the expected term of the option at the time of grant. The dividend yield on our common stock is assumed to be zero since we do not pay dividends and have no current plans to pay them in the future. The market price volatility of our common stock was based on historical volatility since April 13, 2009. Our methodology is consistent with prior period volatility assumptions. The expected life of the options is based upon our anticipated expectations of exercise behavior since no options have been exercised in the past to provide relevant historical data.

b) On December 14, 2010, we appointed Mr. Weiqiu Dong as our chief financial officer. Base on the employment agreement, Mr. Dong will receive an annual base salary of approximately $88,134. In accordance with the appointment, Mr. Dong received, on December 14, 2010, an option to purchase 200,000 shares of the Company's common stock under the 2003 Omnibus Plan. The option vests 60,000 shares on the first anniversary of the date of grant and 70,000 shares on each of the second and third anniversaries of the date of grant. The Option is conditioned upon continued employment on such date, and has a contractual life of 3 years.

The fair value of the option award is estimated on the date of grant using the Black-Scholes option valuation model to be $259,251, of which $19,001 and $49,398 were recorded as compensation expenses for the three and nine months ended July 31, 2011 and $0 was recorded for the three and nine months ended July 31, 2010. The valuation was based on the assumptions noted in the following table.

Expected volatility		96.46	%
Expected dividends
Expected term (in years)	3 years
Risk-free rate		1.06	%

The risk-free interest rate is based on the U.S. Treasury yield curve in effect for the expected term of the option at the time of grant. The dividend yield on our common stock is assumed to be zero since we do not pay dividends and have no current plans to pay them in the future. The market price volatility of our common stock was based on historical volatility since December 13, 2009. Our methodology is consistent with prior period volatility assumptions. The expected life of the options is based upon our anticipated expectations of exercise behavior since no options have been exercised in the past to provide relevant historical data.

The fair value of the option granted will be expensed according to following schedule:

Year	Expensed
2011		68,400
2012		89,205
2013		90,708
2014		10,938
Thereafter
Total	$	259,251

(2) 2007 Non-Qualified Company Stock Grant and Option Plan

On March 19, 2007, our board of directors approved the 2007 Non-Qualified Company Stock Grant and Option Plan (the “2007 Plan”). The 2007 Plan is intended to serve as an incentive to and to encourage stock ownership by our directors, officers, and employees, and certain persons rendering service to us, so that such persons may acquire or increase their proprietary interest in our success, and to encourage them to remain in our service. Under the 2007 Plan, up to 200,000 shares of our common stock may be subject to options.

On January 13, 2010, an option to purchase 50,000 shares was granted under the 2007 Plan to an employee that vests on the 12-month anniversary of the date of grant, conditioned upon continued employment on such date, and has a contractual life of 3 years. The fair value of the option award is estimated on the date of grant using the Black-Scholes option valuation model to be $47,527. The valuation was based on the assumptions noted in the following table. The options were forfeited at departure of the employee on August 6, 2010.

Expected volatility		236.50	%
Expected dividends
Expected term (in years)	3 years
Risk-free rate		1.50	%

The risk-free interest rate is based on the U.S. Treasury yield curve in effect for the expected term of the option at the time of grant. The dividend yield on our common stock is assumed to be zero since we do not pay dividends and have no current plans to pay them in the future. The market price volatility of our common stock was based on historical volatility since January 13, 2009. Our methodology is consistent with prior period volatility assumptions. The expected life of the options is based upon our anticipated expectations of exercise behavior since no options have been exercised in the past to provide relevant historical data.

A summary of option activity under the Company’s option plan as of July 31, 2011 and movement during the nine months then ended are as follow:

							Weighted
							average
			Weighted		Aggregate		remaining
			average		intrinsic		contractual
	Options		exercise price		value		term
			US$		US$
Outstanding at November 1, 2010		70,000		2.57		166,832		1.70
Granted		200,000		2.15		259,251		2.37
Exercised
Forfeited or expired
Outstanding at July 31, 2011		270,000		2.26		426,083		2.20
Vested and expected to vest at July 31, 2011		29,165		2.57		71,411
Exercisable at July 31, 2011		29,165		2.57		71,411

A summary of the status of the Company’s non-vested options as of July 31, 2011 and movements during the nine months then ended are as follow:

			Weighted average
	Options		granted date fair value
			US$
Non-vested at November 1, 2010		58,334		2.57
Granted Since November 1, 2010		200,000		2.15
Vested Since November 1, 2010		17,499		2.57
Forfeited or expired
Non-vested at July 31, 2011		240,835		2.22

As of July 31, 2011, there was $302,205 of unrecognized compensation cost related to non-vested share-based compensation granted under the Company’s option plan. The cost is expected to be recognized over a period of 2.20 years.

(3) Warrants

As of July 31, 2011, the Company has 1,231,428 warrants outstanding at an average exercise price of $1.03 per warrant for one share each of the Company’s common stock. The warrants expire in 2012 and 2013.

	Warrants		Average exercise Price
			US$
Outstanding warrants at November 1, 2010		1,231,428		1.02
Warrants granted
Exercised
Expired/cancelled
Outstanding warrants at July 31, 2011		1,231,428		1.02

Information regarding the warrants outstanding at July 31, 2011 is summarized as below:

Exercise Prices			Weighted Average Remaining		Weighted Average Exercise Price
US$	Warrants Outstanding		Contractual Life (years)		US$

0.88		1,071,428		0.79		0.88
2.00		160,000		1.65		2.00
		1,231,428		0.90		1.02