The Company has established the “2008 Equity Incentive Plan,” which is a shareholder approved plan that permits the granting of stock options and restricted stock to employees, directors and consultants. The 2008 Equity Incentive Plan originally provided for the issuance of up to 400,000 shares of common stock of which 50,000 shares are available for grant as Incentive Stock Options. The exercise price for options awarded is no less than 100% of the fair market value of the common stock on the day of grant. The options generally vest either immediately on the date of grant or 1 to 3 years from the date of grant. On December 30, 2009, the Board of Directors approved an amendment to increase the number of shares available for award under the plan from 400,000 to 800,000, and this amendment was approved by the Company’s shareholders at its Annual Meeting on April 28, 2010. In March of 2012, the Board of Directors approved an amendment to increase the number of shares available for award under the plan to 1,550,000. This amendment is subject to shareholder vote at the Annual Meeting of Shareholders on May 9, 2012.

On March 10, 2010 the Board of Directors approved a change to the vesting of non-employee director stock options. Options granted to non-employee directors after March 10, 2010 will vest immediately upon grant and all outstanding options issued to non-employee directors prior to March 10, 2010 had their vesting date accelerated so that such options were immediately exercisable. These amendments were approved by the shareholders at its Annual Meeting on April 28, 2010, and all shares granted to directors for 2010 vested as of April 28, 2010 The expense associated with this amounted to $370,406.

On May 17, 2010, the Board of Directors approved a modification to options held by all employees, directors and consultants, which had an exercise price greater than the closing price of the Company’s common stock on the OTCBB on May 17, 2010, were re-priced to equal the closing price of the common stock on the OTCBB as of May 17, 2010, which was $5.80. As a result, all such options were revalued based upon this new exercise price, which generated an additional expense of $166,045 for quarter ended June 30, 2010.

For the year ended December 31, 2011, the Company recorded compensation costs for options and shares granted under the plan amounting to $1,201,878 as compared to $1,680,996 for the year ended December 30, 2010. This expense increased basic and diluted net loss per share by $.12 for the year ended December 31, 2011 (an increase of $.30 net loss per share for the year ended December 31, 2010).

Management has valued the options at their date of grant utilizing the Black-Scholes Option Pricing Model. Expected volatility is based upon a weighted average historical volatility of the Company’s common stock, and that of peer companies operating in a similar industry. The risk-free interest rate is based on the implied yield available on U.S. Treasury issues with an equivalent term approximating the expected life of the options depending on the date of the grant and expected life of the options. The expected life of options was based on its term. The Company determined the expected dividend rate based on the assumption and expectation that earnings generated from operations are not expected to be adequate to allow for the payment of dividends in the near future. The following weighted-average assumptions were utilized in the fair value calculations for options granted:

	Year ended
	December 31, 2011			December 31, 2010
Expected dividend yield		0	%		0	%
Expected stock price volatility		95-98	%		50-105	%
Risk-free interest rate		2.58-4.20	%		2.49-4.06	%
Expected life of options	2.5-9.9 Years			0.3-9.8 Years

	Number of Shares Remaining Options		Weighted Average Exercise Price		Weighted-Average Remaining Contractual Term		Aggregate Intrinsic Value

Outstanding at January 1, 2011		295,500	$	5.60
Options granted during 2011		89,150	$	3.54
Options expired/cancelled during 2011		20,250	$	5.67

Outstanding at December 31, 2011		364,400	$	5.20		8.1	$	0
Exercisable at December 31, 2011		247,600	$	5.35		7.9	$	0

The weighted average fair value of options granted during twelve months ended December 31, 2011 was approximately $3.54 ($5.40 for the twelve months ended December 31, 2010, as adjusted for the revaluation of options approved by the Board of Directors on May 17, 2010). During the twelve months ended December 31, 2011, 89,150 options were granted, 20,250 options expired or were cancelled, and no options were exercised. During the twelve months ended December 31, 2010, 112,917 options were granted, 50,500 expired or were cancelled, and no options were exercised. On May 17, 2010, the Board of Directors approved a modification to reduce the exercise price of all outstanding options which had an exercise price greater than the closing of the Company’s common stock on the OTCBB on May 17, 2010. The modified price of the options was the closing price of the Company’s common stock price on the OTCBB on May 17, 2010, which was $5.80.

On December 13, 2010, the Board of Directors approved a restricted stock award to certain employees in lieu of future salary cash payments. The employees forfeited salary over a twelve-week period to purchase common shares, which were valued at fair market value as of the date of grant. On March 30, 2011 the Compensation Committee if the Company’s Board of Directors approved a change to the vesting date for restricted stock held by certain employees from April 1, 2011 to August 1, 2011. On July 29, 2011, the Compensation Committee of the Board of Directors approved a change to the vesting date of these restricted shares to March 1, 2012. On February 28, 2012, the Compensation Committee of the Board of Directors approved a change to the vesting date for the restricted stock held by certain employees from March 1, 2012 to November 15, 2012. A total of 55,969 shares vested on April 1, 2011, and the remaining 169,368 shares will vest on November 15, 2012.

Restricted Shares	Number of Restricted Shares			Weighted Average Fair Value at Grant Date
Non-vested at December 31, 2010		225,337		$	2.80
Vested – April 1, 2011		(55,969	)	$	2.80
Non-vested at December 31, 2011		169,368		$	2.80