Note 7. Stock-based Compensation

6 Months Ended

Feb. 28, 2013

Notes

Note 7. Stock-based Compensation

Note 7.  Stock-Based Compensation

We have both an employee and director stock incentive plan, which are described more fully in Note 10 to the financial statements in our 2012 Annual Report on Form 10-K.  As of February 28, 2013, we had approximately 2,572,000 shares of common stock reserved for future issuance under the stock incentive plans.

Stock-based compensation cost is measured at the grant date based on the value of the award granted using the Black-Scholes option pricing model, and recognized over the period in which the award vests.  For stock awards no longer expected to vest, any previously recognized stock compensation expense is reversed in the period of termination.  The stock-based compensation expense has been allocated to the various categories of operating costs and expenses in a manner similar to the allocation of payroll expense as follows:

	Three Months Ended		Six Months Ended
	February 28, 2013	February 29, 2012	February 28, 2013	February 29, 2012
Cost of sales	$   16,022	$   16,023	$   32,045	$   32,046
Research and development	50,285	51,748	100,570	109,769
Selling, general and administrative	220,113	223,684	443,717	438,695
Total	$ 286,420	$ 291,455	$ 576,332	$ 580,510

During the six months ended February 28, 2013, we granted employees a total of 210,000 stock options at exercise prices ranging from $1.59 to $2.05 with one third vesting each year for the next three years.  The estimated weighted average grant date fair value per share of these stock options was $0.86, and our weighted average assumptions used in the Black-Scholes valuation model to determine this estimated fair value are as follows:

Expected volatility                               63.04%

Expected dividends                             0%

Expected term                                      7.4 years

Risk-free interest rate                           1.05%

Unrecognized stock-based compensation expense expected to be recognized over the estimated weighted-average amortization period of 0.99 years was approximately $1,373,000 as of February 28, 2013.

A summary of the time-based stock option awards as of February 28, 2013, and changes during the six months then ended, is as follows:

	Shares		Weighted- Average  Exercise Price	Weighted- Average Remaining Contract Term (Years)		Aggregate Intrinsic Value
Outstanding as of August 31, 2012	3,182,239	$	3.54
Granted	210,000		1.60
Exercised	-		-		$	-
Forfeited or expired	(102,000)		3.54
Outstanding as of February 28, 2013	3,290,239	$	3.41	6.41	$	23,558
Exercisable as of February 28, 2013	2,104,444	$	3.86	5.51	$	23,558

            The aggregate intrinsic value in the preceding table represents the total pre-tax intrinsic value, based on our closing stock price of $1.32 as of February 28, 2013, which would have been received by the holders of in-the-money options had the option holders exercised their options as of that date.