NOTE 5 SHARE BASED COMPENSATION

2011 Long Term Incentive Plan

In March 2011 shareholders of the Company approved the 2011 Long Term Incentive Plan (the “2011 Plan”), which authorizes 850,000 shares of common stock for grants of various types of equity awards to officers, directors, and employees. In March 2011, the Compensation Committee of the Company’s Board of Directors (the “Compensation Committee”) approved awards of stock options to purchase an aggregate of 305,000 shares of common stock to certain of the Company’s current executive officers and certain employees (245,000 shares) and to current non-employee directors (60,000 shares). As of June 30, 2011, the total shares of common stock available for grants of equity awards under the 2011 Plan was 565,000. The prices at which equity awards may be granted and the exercise prices of stock options granted may not be less than the fair market value of the common stock as quoted at the close on the Nasdaq Stock Market on the grant date. The Compensation Committee administers the plan. Options generally expire ten years after the date of grant and vest one year from the date of grant for non-employee directors, and, in the case of initial grants to officers and employees, vest over five years with 50%, 25% and 25% vesting on the third, fourth, and fifth anniversary of the grant date, respectively.

2007 Equity Incentive Plan

The 2007 Equity Incentive Plan (the “2007 Plan”), which was approved by shareholders of the Company in May 2007, and, as amended, in February 2010, authorizes an aggregate of 800,000 shares of common stock for grants of restricted common stock and stock options to officers, employees, and non-employee directors of the Company. As of June 30, 2011, the total shares of common stock available for grants of equity awards under the 2007 Plan was 20,366. The prices at which restricted common stock may be granted and the exercise price of stock options granted may not be less than the fair market value of the common stock as quoted at the close on the Nasdaq Stock Market on the grant date. The Compensation Committee administers the 2007 Plan. Options generally expire ten years after the date of grant, and in the case of non-employee directors, vest on the first anniversary of the date of grant. In the case of officers and employees, options either vest in equal amounts over three to five years or vest over five years with 50%, 25% and 25% vesting on the third, fourth, and fifth anniversary of the grant date, respectively. Restricted stock grants generally vest in equal proportions over three years.

During the quarter ended March 31, 2011, the Compensation Committee modified an option grant of 200,000 shares to an executive in 2010 by adjusting the vesting schedule to be consistent with options granted to other executives and employees of the Company in March 2011. Accordingly, said option grant, which previously contained a vesting provision of 20% per year, has been modified to 50% in year 3, 25% in year 4 and 25% in year 5. This modification has no impact on total compensation recorded on these grants.

1996 Stock Incentive Plan

The Company’s 1996 Stock Incentive Plan (the “1996 Plan”) expired in accordance with its terms in November 2006. The exercise price of incentive options granted under the 1996 Plan to officers, employees, and non-employee directors of the Company was required by 1996 Plan provisions to be equal at least to the fair market value of the common stock at the date of grant. In general, options under this plan expire ten years after the date of grant and generally vest in equal proportions over three years. Unexercised options granted prior to 1996 Plan expiration remain outstanding until the earlier of exercise or option expiration. Under the 1996 Plan 30,000 fully vested common stock options are the only awards that remain outstanding and unexercised, all at exercise prices higher than the fair market value of the common stock at June 30, 2011.

Stock Option Awards

Under the 2011 and 2007 Plans, the Compensation Committee has approved awards of stock options to purchase an aggregate of 957,500 shares of common stock to the Company’s current (except for a director newly elected in May 2011) and certain former non-employee directors, and to current and certain former Company officers, of which awards covering 40,000 shares from the 2007 Plan and 20,000 shares from the 2011 Plan of common stock expired unexercised, with such shares reverting to the respective plans and eligible for grant. Of these awards grants covering 685,000 shares were made during the nine-month period ended June 30, 2011. The exercise prices of the awards granted was, in each case equal, to the closing market value of the Company’s common stock on the Nasdaq Stock Market on the various grant dates.

The Company recognized approximately $132,000 and $30,000 of compensation expense for stock option awards in its consolidated statements of operations for the three-month periods ended June 30, 2011 and 2010, respectively, and $272,000 and $78,000 for the nine-month periods ended June 30, 2011 and 2010, respectively. As of June 30, 2011, there was approximately $1,179,000 of total unrecognized compensation cost related to 690,000 shares of unvested stock option awards granted under the 2007 and 2011 Plans. That cost is expected to be recognized over the remainder of the weighted average vesting period (extending to March 2016).

The following table summarizes stock option activity under the 2011 Plan, 2007 Plan, from September 30, 2010 through June 30, 2011 (there was no activity during such period in respect of 1996 Plan grants):

	Shares	Weighted Average Exercise Price	Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value
Outstanding at September 30, 2010	187,500	$3.66	8.3
Granted...........................................	685,000	3.67	9.2
Exercised........................................	--	--	--
Forfeited.........................................	30,000	3.73	--
Expired............................................	--	--	--
Outstanding at June 30, 2011	842,500	$3.67	9.1	$47,300

Options expected to vest....................	842,500	$3.67	9.1	$47,300

Options vested and exercisable at June 30, 2011................................	152,500	$3.69	7.3	$44,100

During the nine-month periods ended June 30, 2011 and 2010, the Company granted 685,000 and 87,500 stock options at weighted average grant date fair values of $2.09 and $2.35, respectively.

The fair value of each stock option on the date of grant was estimated using a Black-Scholes option-pricing formula applying the following assumptions for each respective period:

	For the Nine-Month Periods Ended June 30,
	2011	2010
Expected term (in years)....................................................	5.0	5.0
Risk-free interest rate........................................................	0.3% to 2.2%	2.26% to 2.33%
Expected volatility.............................................................	66% to 69%	74% to 78%
Expected dividend yield....................................................	0%	0%

The expected term represents the period over which the stock option awards are expected to be outstanding. The Company based the risk-free interest rate used in its assumptions on the implied yield currently available on U.S. Treasury zero-coupon issues with a remaining term equivalent to the award’s expected term. The volatility factor used in the Company’s assumptions is based on the historical price of its stock over the most recent period commensurate with the expected term of the award. The Company historically has not paid any dividends on its common stock and had no intention to do so on the date the share-based awards were granted. Accordingly, the Company used a dividend yield of zero in its assumptions. The Company estimates the expected term, volatility and forfeitures of share-based awards based upon historical data.

Restricted Stock Awards

Under the 2007 Plan, as of June 30, 2011, the Compensation Committee has approved and granted awards of 183,500 shares of restricted stock, in the aggregate, to certain key employees. Of these awards, 133,335 have vested and 16,366 shares of restricted stock were forfeited and reverted to, and are eligible for re-grant under, the 2007 Plan. No awards of restricted stock were made during the nine months ended June 30, 2011. Vesting of restricted stock awards is generally subject to a continued service condition with one-third of the awards vesting each year on the three successive anniversary dates of the grant date, typically commencing on the first such anniversary date. The fair value of the awards granted was equal to the closing market value of the Company’s common stock as quoted on the Nasdaq Stock Market on the grant date. During the three-month periods ended June 30, 2011 and 2010, the Company recognized approximately ($15,000) and $28,000, respectively, of compensation in its consolidated statements of operations related to restricted stock awards. During the nine-month periods ended June 30, 2011 and 2010, the Company recognized approximately ($1,000) and $87,000, respectively, of compensation cost in its consolidated statements of operations related to restricted stock awards. The compensation recognized in the three - month period ended June 30, 2011 reflects a forfeiture adjustment, which has reduced the amount of expense.

The following table summarizes restricted stock activity under the 2007 Plan from September 30, 2010, through June 30, 2011.

	Shares	Weighted Average Grant Date Fair Value
Non-vested balance at September 30, 2010.................................	79,332	$2.07
Changes during the period:
Shares granted.........................................................................	--	--
Shares vested..........................................................................	32,667	2.08
Shares forfeited.......................................................................	14,866	2.12
Non-vested balance at June 30, 2011...........................................	31,799	$2.04

As of June 30, 2011, there was approximately $18,000 of total unrecognized compensation cost related to 31,799 shares of unvested restricted stock awards (reflected in the table above) granted under the 2007 Plan. That cost is expected to be recognized over the remainder of the requisite service (vesting) periods (approximately 18 months).

Warrants

As of June 30, 2011, warrants to purchase 75,000 shares of the Company’s common stock at an exercise price of $1.75 issued in fiscal 1999 were outstanding. By their terms these warrants expire 90 days after a registration statement registering common stock (other than pursuant to employee benefit plans) is declared effective by the Securities and Exchange Commission. As of June 30, 2011, no such registration statement has been filed with the Securities and Exchange Commission.