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STOCK OPTIONS

12 Months Ended

Dec. 31, 2014

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, 2014 approximately 290,333 remain to be issued in this plan.

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

	Number of Options			Weighted Average Exercise Price
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

Granted		592,000		$	3.88
Exercised		(107,000	)	$	2.17
Cancelled and Forfeited		(87,857	)	$	2.80
Outstanding at December 31, 2014		2,864,189		$	3.69

Exercisable at December 31, 2014		1,376,754		$	4.32

2013

2014

Weighted Average

Exercise Prices

2013 Number Outstanding

2013 Options Exercisable

Granted

Exercised

Vested

Cancelled

Forfeited

2014 Number Outstanding

2014 Options Exercisable

Remaining Contractual Life

$	2.13	125,000	125,000	-	87,500	-	(37,500	)	-		-	-	-
$	2.25	319,000	319,000	-	9,500	-			-		309,500	309,500	1
$	2.41	30,000	30,000	-	10,000	-	(20,000	)	-		-	-	-
$	2.93	35,000	35,000	-	-	-			-		35,000	35,000	1
$	2.95	2,500	2,500	-	-	-	(2,500	)	-		-	-	-
$	6.93	20,000	20,000	-	-	-			-		20,000	20,000	2
$	7.10	12,125	11,410	-	-	715			-		12,125	12,125	4
$	7.18	50,000	50,000	-	-	-			-		50,000	50,000	5
$	7.33	131,190	95,603	-	-	18,743			-		131,190	114,346	5
$	7.68	7,500	7,500	-	-	-			-		7,500	7,500	4
$	8.66	97,857	86,071	-	-	11,786			-		97,857	97,857	4
$	6.60	500	500	-	-	-			-		500	500	5
$	8.32	68,214	39,285	-	-	8,775			(6,786	)	61,428	48,060	5
$	7.85	7,500	4,286	-	-	1,071			-		7,500	5,357	5
$	6.00	30,000	-	-	-	24,000			-		30,000	24,000	6
$	7.45	100,000	100,000	-	-	-			-		100,000	100,000	6
$	3.08	10,000	4,287	-	-	1,429			-		10,000	5,716	6
$	2.46	74,160	48,926	-	-	9,778			(5,714	)	68,446	58,704	6
$	1.89	50,000	21,429	-	-	7,143			-		50,000	28,572	6
$	2.80	10,000	2,857	-	-	1,020			(2,857	)	7,143	3,877	7
$	2.81	15,000	4,286	-	-	2,143			-		15,000	6,429	7
$	2.79	46,000	20,667	-	-	12,667			-		46,000	33,334	8
$	2.54	228,500	58,500	-	-	46,933	(12,500	)	-		216,000	92,933	8
$	3.79	100,000	20,000	-	-	20,000			-		100,000	40,000	8
$	6.00	50,000	27,778	-	-	10,000			-		50,000	37,778	9
$	2.50	10,000	-	-	-	2,000			-		10,000	2,000	9
$	2.97	42,000	20,000	-	-	7,333			-		42,000	27,333	9
$	2.20	45,000	20,000	-	-	8,333			-		45,000	28,333	9
$	2.09	750,000	-	-	-	187,500			-		750,000	187,500	9
$	3.90	-	-	213,000	-	-			-		213,000	-	10
$	3.81	-	-	169,000	-	-			-		169,000	-	10
$	3.63	-	-	35,000	-	-			-		35,000	-	10
$	4.30	-	-	50,000	-	-			-		50,000	-	10
$	4.05	-	-	30,000	-	-			-		30,000	-	10
$	4.07	-	-	45,000	-	-			-		45,000	-	10
$	3.50	-	-	50,000	-	-			-		50,000	-	10
		2,467,046	1,174,885	592,000	107,000	381,369	(72,500	)	(15,357	)	2,864,189	1,376,754

The number and weighted average grant-date fair values of options non-vested at the beginning and end of 2014, 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, 2014		1,292,161		$	0.98

Granted in 2014		592,000		$	1.87
Vested in 2014		(381,369	)	$	1.08
Forfeited in 2014		(15,357	)	$	2.15
Non-vested at December 31, 2014		1,487,435		$	3.11

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 trinomial 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 2014 was estimated on the grant date using a trinomial lattice option-pricing model and the following assumptions: expected volatility of 53% - 54%, expected term of 4-10 years, risk-free interest rates of 0.6%, and expected dividend yield of 0%.

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%.

As of December 31, 2014, the aggregate intrinsic value of all stock options outstanding and expected to vest was approximately $2,265,825 and the aggregate intrinsic value of currently exercisable stock options was approximately $1,101,468. 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 $3.68 closing stock price of our common stock on December 31, 2014, the last trading day of 2014. The total number of in-the-money options outstanding and exercisable as of December 31, 2014 was approximately 819,231.

The total intrinsic value of options exercised during the years ended December 31, 2014, 2013, and 2012 was approximately $229,135, $76,000, and $58,000, 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 $87,475 and $48,000 for the years ended December 31, 2014 and 2013, respectively, and zero due to the utilization of stock swaps only in 2012.

The total fair value of options granted during the years ended December 31, 2014, 2013, and 2012 was approximately $1,107,280, $672,000, and $390,000, respectively. The total fair value of option shares vested during the years ended December 31, 2014, 2013, and 2012, was approximately $412,638, $637,000, and $164,000, respectively.

During the year ended December 31, 2014, we issued 73,699 common shares in exchange for 107,000 employee and non-employee stock options and 33,301 common shares (via stock swaps). Net proceeds from the issuance of common shares along with the shares received in the stock swap exercises were approximately $80,475 for the year ended December 31, 2014.

Stock compensation cost recognized for the years ended December 31, 2014, 2013, and 2012 was approximately $388,000, $506,000, and $161,000, respectively. As of December 31, 2014, there was approximately $1,333,086 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 8 years.

Allocation of stock based compensation expense for the fiscal years ended December 31, 2014, 2013, and 2012 was as follows (in thousands):

	2014		2013		2012
Cost of Sales	$	9	$	12	$	16
Research and development		50		34		37
Salaries and related costs		329		460		108
Total	$	388	$	506	$	161

- 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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