Note L - Stock Option Compensation

9 Months Ended

Sep. 30, 2011

Disclosure of Share-based Compensation Arrangements by Share-based Payment Award [Table Text Block]

NOTE L – STOCK OPTION COMPENSATION

Compensation expense is calculated each quarter for consultants using the Black-Scholes option pricing model, until the option is fully vested.  Based upon options issued to consultants, we recognized compensation benefits of $4,000 and compensation expense of $1,000, respectively, for the three months and nine months ended September 30, 2011. We recognized compensation benefits of $5,000 and $6,000, respectively, for the three months and nine months ended September 30, 2010.  These amounts are included in research and development expenses.

For the three months ended September 30, 2011, we recognized share-based compensation cost for employees and directors of $260,000, which consisted of $242,000 in general and administrative expenses and $18,000 in research and development expenses. For the three months ended September 30, 2010, we recognized share-based compensation cost of $176,000, which consisted of $152,000 in general and administrative expenses and $24,000 in research and development expenses.  For the nine months ended September 30, 2011, we recognized share-based compensation costs for employees and directors of $758,000, which consisted of $698,000 in general and administrative expenses and $60,000 in research and development expenses.  For the nine months ended September 30, 2010, we recognized share-based compensation cost for employees and directors of $488,000, which consisted of $424,000 in general and administrative expenses and $64,000 in research and development expenses.  We did not capitalize any share-based compensation cost.

As of September 30, 2011, there was approximately $1,380,000 of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the stock option plan.  That cost is expected to be recognized over a weighted-average period of approximately 1 year.

For the three months and nine months ended September 30, 2011 and September 30, 2010, we estimated the fair value of each option award on the date of grant using the Black-Scholes model.  We utilized the risk-free interest rate for periods equal to the expected term of the option based upon U.S. Treasury securities in effect at the time of the grant.  We have no present intention of declaring any dividends.  We based expected volatility on historical volatility.  We estimated the expected term of stock options using historical exercise experience.

The following table shows the weighted average assumptions we used to develop the fair value estimates:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2011		2010		2011		2010
Expected volatility	59.5	%	60.2	%	59.6	%	59.5	%
Expected dividends	--		--		--		--
Expected term (in years)	6.0		6.0		6.0		6.0
Risk-free rate	1.1	%	1.4	%	1.8	%	2.2	%
Forfeiture rate - employees	20	%	20	%	20	%	20	%
Forfeiture rate – officers and directors	0	%	0	%	0	%	0	%

A summary of option activity as of September 30, 2011 and changes during the nine months then ended is presented below:

Options	Shares			Weighted- Average Exercise Price	Weighted- Average Remaining Contractual Term		Aggregate Intrinsic Value
Outstanding at January 1, 2011	9,208,200		$	1.03
Granted	845,000			0.90
Exercised	(420,500	)		0.44
Forfeited or expired	(941,500	)		1.00
Outstanding at September 30, 2011	8,691,200		$	1.05		6.0	$	2,108,000
Exercisable at September 30, 2011	4,406,863		$	1.33		4.7	$	926,000

The weighted-average grant-date fair value of options granted during the three months ended September 30, 2011 and 2010 was $0.55 and $0.32, respectively. The weighted-average grant-date fair value of options granted during the nine months ended September 30, 2011 and 2010 was $0.50 and $0.40, respectively.  The total intrinsic value, which represents the difference between the underlying stock’s market price and the option’s exercise price, of options exercised during the three months and nine months ended September 30, 2011 was $198,000 and $279,000, respectively, and for the three months and nine months ended September 30, 2010 was $1,500 and $3,300, respectively.

Cash received from option exercises under all share-based payment arrangements for the three months and nine months ended September 30, 2011 was $131,000 and $185,000, respectively, and for the three months and nine months ended September 30, 2010 was $1,400 and $2,800, respectively.  No tax benefit was realized from option exercises.

Restricted Stock Awards

We periodically grant restricted stock awards to certain officers and other employees, as well as directors, that typically vest six months to one year from their grant date. We recognized $12,000 and $31,000, respectively, of compensation expense during the three-month and nine-month periods ended September 30, 2011 and we recognized $43,000 and $215,000, respectively, of compensation expense during the three-month and nine-month periods ended September 30, 2010 related to restricted stock awards.  Stock compensation expense is recognized over the vesting period of the restricted stock.  At September 30, 2011 we had $29,000 of total unrecognized compensation cost related to non-vested restricted stock, all of which will be recognized from October 2011 to April 2012.

	Shares			Weighted Average Grant-Date Fair Value
Non-vested balance at January 1, 2011		164,000		$	0.70
Changes during the period:
Shares granted		40,000			1.24
Shares vested		(164,000	)		0.70
Shares forfeited		--			--
Non-vested balance at September 30, 2011		40,000		$	1.24