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STOCK OPTIONS

12 Months Ended

Dec. 31, 2013

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, 2013 approximately 269,500 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, 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

Granted		897,000		$	2.36
Reinstated		94,285		$	7.00
Exercised		(51,000	)	$	1.38
Cancelled		(352,700	)	$	3.13
Outstanding at December 31, 2013		2,467,046		$	3.55

Exercisable at December 31, 2013		1,174,885		$	4.34

				Weighted Average
Exercise Prices		Number Outstanding		Remaining Contractual Life	Options Exercisable

$	2.13		125,000	1 year		125,000
$	2.25		319,000	2 years		319,000
$	2.41		30,000	1 year		30,000
$	2.93		35,000	2 years		35,000
$	2.95		2,500	1 year		2,500
$	6.93		20,000	3 years		20,000
$	7.10		12,125	5 years		11,410
$	7.18		50,000	6 years		50,000
$	7.33		131,190	6 years		95,603
$	7.68		7,500	5 years		7,500
$	8.66		97,857	5 years		86,071
$	6.60		500	6 years		500
$	8.32		68,214	6 years		39,285
$	7.85		7,500	6 years		4,286
$	6.00		30,000	7 years		-
$	7.45		100,000	7 years		100,000
$	3.08		10,000	7 years		4,287
$	2.46		74,160	7 years		48,926
$	1.89		50,000	7 years		21,429
$	2.80		10,000	8 years		2,857
$	2.81		15,000	8 years		4,286
$	2.79		46,000	9 years		20,667
$	2.54		228,500	9 years		58,500
$	3.79		100,000	9 years		20,000
$	6.00		50,000	10 years		27,778
$	2.50		10,000	10 years		-
$	2.97		42,000	10 years		20,000
$	2.20		45,000	10 years		20,000
$	2.09		750,000	10 years		-
			2,467,046			1,174,885

The number and weighted average grant-date fair values of options non-vested at the beginning and end of 2013, 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, 2013		646,567		$	1.43
Granted in 2013		897,000		$	0.75
Reinstated 2013		94,285		$	3.32
Vested in 2013		(340,691	)	$	1.87
Forfeited in 2013		(5,000	)	$	0.95

Non-vested at December 31, 2012		1,292,161		$	0.98

Common shares required to be issued upon the exercise of stock options and warrants would be issued from our authorized and unissued shares. We calculated the fair value of issued options utilizing a binomial lattice with an expected life calculated via the simplified method as we do not have sufficient history to determine actual expected life.

The grant date fair value of options granted in 2013 was estimated on the grant date using both binomial and trinomial lattice option-pricing model and the following assumptions: expected volatility of 43% - 47%, expected term of 3-5 years, risk-free interest rates of 0.4% - 0.6%, and expected dividend yield of 0%.

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 rates of 1.8% - 2.6%, and expected dividend yield of 0%.

As of December 31, 2013, the aggregate intrinsic value of all stock options outstanding and expected to vest was approximately $637,000 and the aggregate intrinsic value of currently exercisable stock options was approximately $8,000. 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 $2.15 closing stock price of our common stock on December 31, 2013, the last trading day of 2013. The total number of in-the-money options outstanding and exercisable as of December 31, 2013 was approximately 925,000.

The total intrinsic value of options exercised during the years ended December 31, 2013, 2012 and 2011 was approximately $76,000, $58,000 and $157,000, 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 $48,000, zero and zero due to the utilization of stock swaps only for the years ended December 31, 2013, 2012 and 2011, respectively.

The total fair value of options granted during the years ended December 31, 2013, 2012 and 2011 was approximately $672,000, $390,000 and $33,000, respectively. The total fair value of option shares vested during the years ended December 31, 2013, 2012, and 2011 was approximately $637,000, $164,000 and $248,000, respectively.

During the year ended December 31, 2013, we issued 44,798 common shares in exchange for 51,000 employee and non-employee stock options and 6,202 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 approximately $48,000 for the year ended December 31, 2013.

Stock compensation cost recognized for the years ended December 31, 2013, 2012 and 2011 was approximately $506,000, $161,000 and $132,000, respectively. As of December 31, 2013, there was approximately $964,200 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, 2013, 2012 and 2011 was as follows (in thousands):

	2012		2012		2011

Cost of sales	$	12	$	16	$	16
Research and development		34		37		11
Salaries and related costs		460		108		105

Total	$	506	$	161	$	132

- Definition

The entire disclosure for compensation-related costs for equity-based compensation, which may include disclosure of policies, compensation plan details, allocation of equity compensation, incentive distributions, equity-based arrangements to obtain goods and services, deferred compensation arrangements, employee stock ownership plan details and employee stock purchase plan details.

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