Note 9 Capital and Stock Based Compensation

On December 8, 2010, shareholders approved an amendment to the Company's 1998 Stock Incentive Plan to increase the authorized shares of common stock reserved for awards under the Plan by 2,000,000 shares, to a total of 7,205,000 shares. These authorized shares can take the form of non-qualified stock options, stock appreciation rights (SARs), restricted share awards, annual awards of stock to non-employee directors and performance-based awards.

Options and non-vested shares

As of September 30, 2011, there were 1,285,000 shares available for future issuance under the Plan.

The following is a summary of option transactions for the three months ended September 30, 2011:

Total non-cash stock based compensation included in the consolidated statements of operations for the three months ended September 30, 2011 was $ 395,632, as discussed below.

Non-employee options

There were no non-employee options issued during the three months ended September 30, 2011. In February 2009, the Company granted 262,500 time-based options, with an exercise price of $1.20 per share to John T. Wilson, our President and CEO, who was then a non-employee consultant to the Company.

Since these options were issued to a non-employee, the Company determined their fair value at the end of each reporting period. The related option expense was recognized in the unaudited condensed consolidated statements of operations using the accelerated method. Effective September 27, 2011, Mr. Wilson became the President and CEO of the Company. This change in status from non-employee to employee triggered a re-measurement of the fair value of these awards.

The fair value of these time-based options at September 27, 2011 was determined based on the Black-Scholes valuation model using the following assumptions:

The expected life of the time-based options is the remaining contractual term. The Company recorded a non-cash charge of ($49,825) during the three months ended September 30, 2011 related to these non-employee time-based options for the period ended September 27, 2011. The credit entry was necessary to reverse previously recorded stock compensation expense related to the shares that were unvested as of the change in status from non-employee to employee. The unvested shares were then revalued as discussed above. Unrecognized compensation expense for these options is included below within the “employee option” section.

The Company recorded non-cash charges of $32,830 related to these time based options for the three months ended September 30, 2010.

Employee and Director option and share compensation

The Company's compensation policy is designed to provide the Company's directors with a portion of their annual Board compensation in the form of equity. The number of shares for each director award is, however, subject to a maximum annual cap of 15,000 shares. The Company issued 75,000 shares in July 2011, pursuant to this policy.

During the three months ended September 30, 2011, no stock options were issued to employees. During the quarter ended September 30, 2010, 800,000 stock options were issued to an employee, of which 400,000 were forfeited.

Non-cash compensation expense of $445,459 was recorded for employees and directors options and non-vested shares for the three months ended September 30, 2011 and is included in the unaudited condensed consolidated statements of operations for the period then ended. The fair value of the grants is being recognized over the requisite service period using the accelerated method. Unrecorded compensation expense for employee options was $661,233 as of September 30, 2011.

Employee and director non-cash option and unvested share expense of $262,123 and $87,500 respectively for the three months ended September 30, 2010 was reflected in the unaudited condensed consolidated statements of operations for the period then ended.