SHARE-BASED COMPENSATION

3 Months Ended

Jun. 30, 2011

SHARE-BASED COMPENSATION

SHARE-BASED COMPENSATION

8. SHARE-BASED COMPENSATION

The Company accounts for transactions under share-based payment arrangements with employees based on fair value. Liability-classified awards are remeasured to fair value at each balance sheet date until the award is settled. The Company currently has no liability-classified awards.  Equity-classified awards, including grants of employee stock options, are measured at the grant-date fair value of the award and are not subsequently remeasured unless an award is modified.  The cost of share-based awards is recognized in the income statement over the period during which an employee is required to provide the service in exchange for the award, or the vesting period. All of the Company’s stock options are service-based awards, and because the Company’s stock options are “plain vanilla,” as defined by the U. S. Securities and Exchange Commission in Staff Accounting Bulletin No. 107, they are reflected only in Stockholders’ Equity and Compensation Expense accounts.

Stock Options

As of June 30, 2011, the Company had the following two shareholder approved plans under which shares were available for equity based awards: The 2005 Stock Option Plan (the “2005 Plan”) wherein 700,000 shares of common stock are reserved for issuance until the Plan terminates on August 21, 2015, and; The Independent Director Stock Option and Stock Grant Plan (the “2004 Directors Plan”) wherein 75,000 shares of common stock are reserved for issuance until the plan terminates in 2014.

Under the 2005 Plan, eligible employees and certain independent consultants may be granted options to purchase shares of the Company’s common stock. The shares issuable under the 2005 Plan will either be shares of the Company’s authorized but previously unissued common stock or shares reacquired by the Company, including shares purchased on the open market.  As of June 30, 2011, there were 142,994 options available for grant under the 2005 Plan.

Under the 2004 Directors Plan, upon election to the Board of Directors at the annual stockholders meeting, a newly elected non-employee director will be granted a ten-year option to purchase 2,000 shares of the Company’s common stock and an additional 2,000 shares to the director serving as Chairman of the Board. Options granted vest and become exercisable six months from the date of grant.  In addition, on the date of each Annual Meeting of Stockholders, each non-employee director continuing in office is automatically issued 875 shares of common stock, non-transferable for nine months following the date of grant. As of June 30, 2011, there were 38,123 options available for grant under the 2004 Directors Plan.

The following table presents shares authorized, available for future grant and outstanding under each of the Company’s plans:

	As of June 30, 2011
	Authorized	Available	Outstanding
2005 Plan	700,000	142,994	424,360
2004 Directors Plan	75,000	38,123	—
1994 Plan	—	—	1,500
Total	775,000	181,117	425,860

All stock option grants made under the 2005 Plan and the 2004 Directors Plan were at exercise prices no less than the Company’s closing common stock price on the date of grant. Options under the 2005 Plan and 2004 Directors Plan were determined by the Board of Directors or the Stock Option and Compensation Committee of the Board in accordance with the provisions of the respective plans.  The terms of each option grant include vesting, exercise, and other conditions are set forth in a Stock Option Agreement evidencing each grant. No option can have a life in excess of ten (10) years.  The Company records compensation expense for employee stock options based on the estimated fair value of the options on the date of grant using the Black-Scholes option-pricing model. The model requires various assumptions, including a risk-free interest rate, the expected term of the options, the expected stock price volatility over the expected term of the options, and the expected dividend yield. Compensation expense for employee stock options is recognized ratably over the vesting term. Compensation expense recognized for options issued under the 2005 Plan was $50,000 and $8,000 for the three months ended June 30, 2011 and 2010, respectively. No compensation expense was recognized under the 2004 Directors Plan for the three months ended June 30, 2011 and 2010, respectively. All share-based compensation has been classified as General and Administrative expense.

A summary of option activity under the Company’s stock plans for the three months ended June 30, 2011 is presented below:

Option Activity	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding at March 31, 2011	426,650		$	2.49	8.8 years	$	395,693
Granted	800		3.64		—	—
Exercised	—		$	—	—	—
Forfeited or expired	(1,590	)	$	1.95	—	—
Outstanding at June 30, 2011	425,860		$	2.50	8.6 years	$	487,284
Exercisable at June 30, 2011	71,710		$	1.85	7.3 years	$	128,666

The aggregate intrinsic value in the table above is before applicable income taxes and represents the excess amount over the exercise price optionees would have received if all options had been exercised on the last business day of the period indicated, based on the Company’s closing stock price of $3.64 for such day.

A summary of the Company’s non-vested options for the three months ended June 30, 2011 is presented below:

Nonvested Options	Shares		Weighted Average Grant-Date Fair Value
Nonvested at March 31, 2011	377,040		$	1.87
Granted	800		.41
Vested	(22,100	)	.64
Forfeited or expired	(1,590	)	.59
Nonvested at June 30, 2011	354,150		$	1.60

The following table summarizes the weighted average characteristics of outstanding stock options as of June 30, 2011:

	Outstanding Options				Exercisable Options
Range of Exercise Prices	Number of Shares	Remaining Life (Years)	Weighted Average Price		Number of Shares	Weighted Average Price
$  1.41 - $2.60	194,310	7.5	$	1.84	70,160	$	1.81
$  3.04 - $4.40	231,550	9.5	3.05		1,550	3.91
Total stock options	425,860	8.6	$	2.50	71,710	$	1.85

There were 800 stock options granted during the three months ended June 30, 2011. No stock options were granted during the three months ended June 30, 2010. The value assumptions related to options granted during the three months ended June 30, 2011 were as follows:

	2011
Exercise Price:	$	3.64
Volatility:	56.18		%
Risk Free Rate:	.19		%
Vesting Period:	0 years
Forfeiture Rate:	5.54		%
Expected Life	.25 years
Dividend Rate	0		%

As of June 30, 2011, total unrecognized share-based compensation expense related to all unvested stock options was $409,000, which is expected to be expensed over a weighted average period of 2.4 years.

On July 1, 2011, 131,200 stock options were granted under the 2005 Plan.

Warrant

At June 30, 2011 the Company had no warrants outstanding. At June 30, 2010, the Company had a single warrant outstanding which allowed the warrant holder rights to acquire 5,000 shares of the Company’s common stock.  The warrant was valued at the date of grant and was amortized as premium, but was subsequently deemed to have no value as a result of a reverse split which occurred in a prior year.  Accordingly, no expense was recognized in the quarters ended June 30, 2011 or 2010.  The warrant expired in April 2011.