NOTE 14. STOCK OPTIONS

On October 30, 2007, our stockholders approved and the Board of Directors adopted an amendment to the 2003 Executive and Employee Stock Option Plan (the "Plan") to increase the maximum aggregate number of shares of common stock reserved for issuance under the Plan from 1.2 million shares (already reserved against outstanding options) to 1.7 million shares. Except for the increase in the number of shares covered by the Plan, the Plan remained otherwise unchanged. In 2001, the Board of Directors adopted the 2001 Executive and Employee Stock Option Plan which reserved for issuance 1,200,000 stock options. Stock options typically have a ten-year life and currently vest over a seven year period.

In July of 2012, the stockholders approved the 2012 Share Incentive Plan covering a total of 750,000 shares of common stock issuable upon exercise of options to be granted under the plan. At December 31, 2012 approximately 416,500 remain to be issued in this plan.

The status of our stock options and stock awards are summarized as follows:

	Number			Weighted Average
	Of Options			Exercise Price

Outstanding at December 31, 2010		1,948,260		$	3.79

Granted		25,000		$	2.81
Exercised		(69,000	)	$	0.57
Cancelled		(371,414	)	$	3.52
Outstanding at December 31, 2011		1,532,846		$	3.99

Granted		379,500		$	2.90
Exercised		(28,000	)	$	0.70
Cancelled		(4,885	)	$	7.33
Outstanding at December 31, 2012		1,879,461		$	3.81

Exercisable at December 31, 2012		1,232,894		$	3.73

				Weighted Average
Exercise Prices		Number Outstanding		Remaining Contractual Life	Options Exercisable

$	0.70		7,000	1 year		7,000
$	0.75		21,500	1 year		21,500
$	1.30		25,000	1 year		25,000
$	2.13		125,000	2 years		125,000
$	2.25		322,500	3 years		322,500
$	2.41		40,000	2 years		40,000
$	2.93		35,000	3years		35,000
$	2.95		2,500	2 years		2,500
$	3.25		331,700	1 years		331,700
$	6.93		20,000	4 years		20,000
$	7.10		12,125	6 years		10,696
$	7.18		50,000	7 years		50,000
$	7.33		131,190	7 years		77,809
$	7.68		7,500	6 years		5,357
$	8.66		97,857	6 years		70,714
$	6.60		500	7 years		500
$	8.32		68,214	7 years		29,643
$	7.85		7,500	7 years		3,214
$	6.00		30,000	8 years		-
$	7.45		14,286	8 years		14,286
$	3.08		10,000	8 years		2,858
$	2.46		65,589	8 years		19,759
$	1.89		50,000	8 years		14,286
$	2.80		10,000	9 years		1,429
$	2.81		15,000	9 years		2,143
$	2.79		46,000	10 years		-
$	2.54		233,500	10 years		-
$	3.79		100,000	10 years		-


			1,879,461			1,232,894

The number and weighted average grant-date fair values of options non-vested at the beginning and end of 2012, as well as options granted, vested and forfeited during the year was as follows:

	Number Of Options			Weighted Average Grant Date Fair Value
Non-vested at January 1, 2012		337,734		$	2.12
Granted in 2012		379,500		$	1.03
Vested in 2012		(65,782	)	$	2.50
Forfeited in 2012		(4,885	)	$	2.82

Non-vested at December 31, 2012		646,567		$	1.43

Common shares required to be issued upon the exercise of stock options and warrants would be issued from our authorized and unissued shares.

The grant date fair value of options granted in 2012 was estimated on the grant date using a binomial lattice option-pricing model and the following assumptions: expected volatility of 41-43%, expected term of 5 years, risk-free interest rate of 0.4%, and expected dividend yield of 0%.

The grant date fair value of options granted in 2011 was estimated on the grant date using a binomial lattice option-pricing model and the following assumptions: expected volatility of 41-42%, expected term of 7 years, risk-free interest rate of 1.8-2.6%, and expected dividend yield of 0%.

The grant date fair value of options granted in 2010 was estimated on the grant date using a binomial lattice option-pricing model and the following assumptions: expected volatility of 42% - 43%, expected term of 7 years, risk-free interest rate of 1.1% - 2.27%, and expected dividend yield of 0%.

Expected volatility is based on a weighted average of the historical volatility of the Company's stock and peer company volatility. The weighting percentages relative to our stock and the peer group was adjusted in 2010 to a 50%/50% weighting. We believe that due to our relatively low trading volume, we cannot calculate a true measurement of our volatility using just our price history alone. Therefore, we include in our calculation a peer group volatility factor. Previous to 2010 we used a weighting of 75% to 25% in favor of the peer group as our price history contained large erratic price swings that were not indicative of our true volatility. Our peer group has remained relatively the same throughout our calculations year over year. The average expected life was calculated using the simplified method as we believe we do not have sufficient history. The risk-free rate is based on the rate of U.S. Treasury zero-coupon issues with a remaining term equal to the expected life of the options. The Company uses historical data to estimate pre-vesting forfeiture rates.

As of December 31, 2012, the aggregate intrinsic value of all stock options outstanding and expected to vest was approximately $194,000 and the aggregate intrinsic value of currently exercisable stock options was approximately $175,000. The intrinsic value of each option share is the difference between the fair market value of our common stock and the exercise price of such option share to the extent it is "in-the-money". Aggregate intrinsic value represents the value that would have been received by the holders of in-the-money options had they exercised their options on the last trading day of the year and sold the underlying shares at the closing stock price on such day. The intrinsic value calculation is based on the $2.42 closing stock price of our common stock on December 31, 2012, the last trading day of 2012. The total number of in-the-money options outstanding and exercisable as of December 31, 2012 was approximately 555,000.

The total intrinsic value of options exercised during the years ended December 31, 2012, 2011 and 2010 was approximately $58,000, $157,000 and $198,000, respectively. Intrinsic value of exercised shares is the total value of such shares on the date of exercise less the cash received from the option holder to exercise the options. The total cash proceeds received from the exercise of stock options was approximately zero, zero and $9,000 for the years ended December 31, 2012, 2011and 2010, respectively.

The total fair value of options granted during the years ended December 31, 2012, 2011 and 2010 was approximately $390,000, $33,000 and $496,000, respectively. The total fair value of option shares vested during the years ended December 31, 2012, 2011, and 2010 was approximately $164,000, $248,000 and $121,000, respectively.

During the year ended December 31, 2012, we issued 20,814 common shares in exchange for 28,000 employee and non-employee stock options and 7,186 common shares (via a stock swap). Net proceeds from the issuance of common shares along with the shares received in the stock swap exercises were zero for the year ended December 31, 2012.

Stock compensation cost recognized for the years ended December 31, 2012, 2011 and 2010 was approximately $161,000, $132,000 and $163,000, respectively. As of December 31, 2012, there was approximately $608,500 of total unrecognized stock-based compensation cost, related to unvested stock options granted under the Amended Plan. This cost is expected to be recognized over a weighted-average period of approximately 5 years.

Allocation of stock based compensation expense for the fiscal years ended December 31, 2012, 2011 and 2010 was as follows (in thousands):

	2012		2011		2010

Cost of sales	$	16	$	16	$	16
Research and development		37		11		33
Salaries and related costs		108		105		114

Total	$	161	$	132	$	163