NOTE J – STOCK-BASED COMPENSATION

The Company maintains five stock option plans: the 1995 Stock Option Plan, the 1996 Non-Employee Director Plan, the 1998 Stock Option Plan, the 2004 Stock Compensation Plan and the 2009 Stock Compensation Plan.

The 1995 Stock Option Plan

The 1995 Stock Option Plan was designed to provide employees with incentive or non-qualified options to purchase up to 700,000 shares of common stock. The options vest ratably over four to five years from the date of grant. All outstanding options vest upon a change in control of the Company. Options granted under this Plan expire no later than ten years after the date granted or sooner in the event of death, disability, retirement or termination of employment. As of December 31, 2011 and 2010, options to purchase 10,500 shares of Company stock were outstanding under this Plan. The 1995 Stock Option Plan terminated on December 21, 2005, although that termination does not adversely affect any options outstanding under the Plan.

The 1996 Non-Employee Director Plan

As amended on May 16, 2001, the Non-Employee Plan was designed to provide for the grant of non-qualified stock options to purchase up to 200,000 shares of common stock to members of the Board of Directors who are not employees of the Company. At the completion of the Company's initial public offering, each non-employee director was granted options to purchase 4,000 shares of common stock for each full remaining year of the director's term.

As of March 2006, the equity component of the director compensation plan was restructured, so that each non-employee director received after that date an annual grant of options to purchase 7,500 shares of common stock as of the date of each Annual Shareholder Meeting. All options vest ratably over a three-year term and have an exercise price equal to the fair market value of the common stock on the date of grant. As of December 31, 2011 and 2010, options to purchase 60,000 and 70,000 shares, respectively, were outstanding under this plan. The 1996 Non-Employee Director Plan terminated on July 14, 2006, although that termination does not adversely affect any options outstanding under the Plan.

The 1998 Stock Option Plan

As amended on May 16, 2001, the 1998 Stock Option Plan is designed to provide employees with incentive or non-qualified options to purchase up to 600,000 shares of common stock. The options vest ratably over four to five years from the date of the grant. All outstanding options vest upon a change in control of the Company. Options granted under this Plan expire no later than ten years after the date granted or sooner in the event of death, disability, retirement, or termination of employment. As of December 31, 2011 and 2010, options to purchase 242,000 and 268,000 shares, respectively, were outstanding under this Plan. The 1998 Stock Option Plan terminated on February 17, 2008, although that termination does not adversely affect any options outstanding under the Plan.

The 2004 Stock Compensation Plan

The 2004 Stock Compensation Plan is designed to further the interests of the Company and its shareholders by providing incentives in the form of incentive or non-qualified stock options or restricted stock grants to key employees and non-employee directors who contribute materially to the success and profitability of the Company. Under this Plan, restricted stock grants are not considered outstanding options upon grant but are considered issued and outstanding stock. Any forfeited restricted stock awards are considered available for grant. Except for annual grants to non-employee directors described below, the equity awards typically vest ratably over five years from the date of the grant. Each non-employee director of the Company receives an annual award of options to purchase 7,500 shares of common stock as of the date of the Annual Shareholder Meeting. Under each grant agreement, the options vest ratably over a three-year period and have an exercise price equal to the fair market value of the common stock on the date of grant. All outstanding grants vest upon a change in control of the Company. Options granted under this Plan expire no later than ten years after the date granted or sooner in the event of death, disability, retirement, or termination of employment. At the Company's Annual Meeting of Shareholders on May 24, 2007, the shareholders approved an amendment to the 2004 Stock Compensation Plan to authorize an additional 500,000 shares under the Plan. As of December 31, 2011 and 2010, options to purchase 917,950 and 908,700 shares respectively, were outstanding, and 4,100 and 30,800 options, respectively, were available to be granted as options or restricted stock under this Plan.

The 2009 Stock Compensation Plan

The 2009 Stock Compensation Plan is designed to further the interests of the Company and its shareholders by providing incentives in the form of incentive or non-qualified stock options or restricted stock grants to key employees and non-employee directors who contribute materially to the success and profitability of the Company. Under this Plan, restricted stock grants are not considered outstanding options upon grant but are considered issued and outstanding stock. Any forfeited restricted stock awards are considered to be available for grant. Except for annual grants to non-employee directors described above, the equity awards typically vest ratably over five years from the date of the grant. All outstanding grants vest upon a change in control of the Company. Options granted under this Plan expire no later than ten years after the date granted or sooner in the event of death, disability, retirement, or termination of employment. At the Company's Annual Meeting of Shareholders on May 21, 2009, the shareholders approved the 2009 Stock Compensation Plan and authorized 600,000 shares available for grant under the Plan. As of December 31, 2011 and 2010 options to purchase 81,000 and 0 shares, respectively, were outstanding and 519,000 and 600,000 shares, respectively, were available to be granted as options or restricted stock under this Plan.

Summary Stock Option Information

The fair value of each option grant through June 30, 2011, is estimated on the date of grant using a Binomial options-pricing model. The Company's stock-based compensation expense model uses graded vesting, with shares being earned per day under the accrual method. In addition, the Company estimates forfeitures on the date of grant. The following weighted-average assumptions were used for grants in the years ended December 31, 2011, 2010 and 2009, respectively; no dividend yield for all years; expected volatility of 99%, 103% and 108%; risk-free interest rates of approximately 3.2%, 2.9%, and 3.5%; and expected lives of 8.0, 7.6, and 7.2 years. The weighted average fair value of options granted during the years ended December 31, 2011, 2010 and 2009 were $4.48, $2.69, and $1.03, respectively.

A summary of the status of the Company's stock option plans and other stock options granted as of December 31, 2011, 2010 and 2009 and changes during the years ended on those dates is presented below:


	Options			Weighted Average Exercise Price
Outstanding as of January 1, 2009		1,106,400		$	6.18

Granted		328,350		$	1.21
Exercised		—			—
Forfeited		(229,100	)	$	8.17

Outstanding as of December 31, 2009		1,205,650		$	4.45

Granted		359,850		$	3.08
Exercised		(2,700	)	$	0.93
Forfeited		(155,600	)	$	4.44

Outstanding as of December 31, 2010		1,407,200		$	4.11

Granted		96,650		$	5.21
Exercised		(450	)	$	1.29
Forfeited		(41,950	)	$	15.08

Outstanding as of December 31, 2011		1,461,450		$	3.87

The following table summarizes information concerning outstanding and exercisable stock options as of December 31, 2011:


Range of Exercise Prices	Number Outstanding		Weighted Average Remaining Contractual Life (years)		Weighted Average Exercise Price

All Outstanding Options
$ 0.93 – $ 2.09		291,950		7.3	$	1.22
2.10 – 3.58		289,000		7.9	$	2.71
3.59 – 4.45		212,850		7.2	$	4.04
4.46 – 4.63		323,000		5.6	$	4.53
4.64 – 16.23		344,650		4.9	$	6.36

		1,461,450			$	3.87


Exercisable Options
$ 0.93 – $ 2.09		138,173		7.3	$	1.25
2.10 – 3.58		83,900		7.5	$	2.81
3.59 – 4.45		124,170		6.1	$	4.12
4.46 – 4.63		291,400		5.6	$	4.52
4.64 – 16.23		238,600		3.2	$	6.86

		876,243			$	4.42

As of December 31, 2010 and December 31, 2009, there were 651,936 and 521,200 exercisable options outstanding at weighted average exercise prices of $5.61 and $6.46, respectively.

The following table summarizes option grant activity from January 1, 2011 through December 31, 2011:


	Shares Available for Grant			Options Outstanding			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life
Balance at January 1, 2011		630,800			1,407,200		$	4.11		7.09
Options expired		350			(35,950	)	$	17.12
Options and restricted stock granted		(113,650	)		96,650		$	5.21
Options and restricted stock forfeited		5,600			(6,000	)	$	2.88
Options exercised		—			(450	)	$	1.29

Balance at December 31, 2011		523,100			1,461,450		$	3.87		6.46

Options exercisable at December 31, 2011		—			876,243		$	4.42		5.47

*	Options expired and forfeited are included in the shares available for grant, but do not include options that had expired or were forfeited during 2011 under terminated plans.

The weighted-average grant date fair value of options granted during the years ended December 31, 2011, 2010 and 2009 was $4.48, $2.69 and $1.03, respectively. For the years ended December 31, 2011 and 2010, the total intrinsic value of options exercised was less than $1,700 and $5,000, respectively. There were no options exercised during the year ended December 31, 2009. As of December 31, 2011, there was $614,000 of unrecognized compensation cost related to non-vested options that is expected to be recognized over a weighted average period of 2.1 years. The total fair value of options and restricted stock vested during the years ended December 31, 2011 and 2010 was $633,000 and $636,000, respectively. The total fair value of options vested during the year ended December 31, 2011 that were issued prior to adoption of ASC 718 was $0. The aggregate intrinsic value of options fully vested at December 31, 2011 was $550,000. The aggregate intrinsic value of options outstanding at December 31, 2011 and expected to vest was $1.3 million.

The Company consistently used a binomial model for estimating the fair value of options granted in the years ended December 31, 2010 and 2009, and during the six months ended June 30, 2011. As noted above, as of July 1, 2011, the Company converted to a new equity compensation administration and reporting platform, and converted to the Black-Scholes valuation model from a binomial (Lattice) model. The Company used historical data to estimate the option exercise and employee departure behavior used in the valuation models. Forfeitures are estimated on the date of grant and shares vest on a graded schedule, with shares being earned per day under the accrual method. The expected term of options granted is derived from the output of the option pricing model used and represents the period of time that options granted are expected to be outstanding. The risk-free rates are based on the U.S. Treasury stripped coupon interest in effect at the date of grant based on the expected term of the option granted. Expected volatility is based on historical volatility of the Company's stock.

Following are the weighted-average and range assumptions, where applicable, used for each respective period:

Twelve Months Ended

December 31,
2011

December 31,
2010

December 31,
2009

(Binomial/Black-
Scholes)

(Binomial)

Expected dividend yield

0.0%

Risk-free interest rate

0.34 to 3.55%

0.47 to 4.08%

1.10 to 3.96%

Weighted-average expected volatility

99.09%

103.34%

108.32%

Expected term

2.5 to 9.0 years

2.5 to 8.9 years

2.5 to 8.8 years

Forfeiture rate

0.51 to 81.79%

0.52 to 28.01%

0.59 to 28.01%

Respective service period

3 to 5 years

Restricted Stock Awards

In fiscal year 2006, the Company granted unvested common stock awards ("restricted stock") to certain key employees pursuant to the 2004 Stock Compensation Plan. The shares vest ratably over five years. The restricted stock awards granted in 2006 were accounted for using the measurement and recognition principles of ASC 718. Compensation for restricted stock awards is measured at fair value on the date of grant based on the number of shares expected to vest and the quoted market price of the Company's common stock. Compensation cost for all awards will be recognized in earnings, net of estimated forfeitures, on a straight-line basis over the requisite service period.

In February 2008, the Company granted 25,000 shares of restricted stock and options to purchase 150,000 shares of common stock to the Company's Chief Executive Officer. The option award vested evenly over a three-year period. The 25,000 shares of restricted stock vested entirely on the third anniversary date of the date of grant or upon involuntary termination. These grants were inducement grants made outside of the Company's equity compensation plans.

In February 2011, the Company granted 17,000 shares of restricted stock with a fair value of approximately $101,000 to a key employee pursuant to the 2004 Stock Compensation Plan. The shares vest ratably over five years.

The Company recorded $23,000, $62,000 and $83,000 in compensation expense related to the restricted stock that vested during the years ended December 31, 2011, 2010, and 2009, respectively. As of December 31, 2011, there was approximately $83,000 of total unrecognized compensation cost related to restricted stock awards granted under the Plan, which is expected to be recognized over a period of 4.08 years.

The Company received proceeds of less than $1,000 and $2,500 from stock option exercises under all stock-based payment arrangements for the years ended December 31, 2011 and 2010, respectively. The Company did not receive any proceeds from stock option exercises under all share-based payment arrangements for the year ended December 31, 2009 because no exercises were made during that year. There were no capitalized stock-based compensation costs at December 31, 2011.