NOTE 11 — EMPLOYEE STOCK OPTION PLAN:

The Company has a 1999 Stock Option Plan ("SOP") originally covering 187,500 shares of Common Stock. Under the terms of the SOP, the Compensation Committee of the Company's board is authorized to grant incentive options to key employees and to grant non-qualified options to key employees and key individuals. The options become exercisable at such times and under such conditions as determined by the Compensation Committee. The SOP was amended at the Company's 2005 stockholders' meeting. The number of options under the SOP was increased to cover 375,000 shares of common stock. It was also amended to allow independent directors to be eligible for grants under the portion of the SOP concerning non-qualified options. As of December 31, 2014, there were zero outstanding options under this SOP. No additional options may be issued under the SOP more than 10 years after its adoption

Effective June 3, 2008, the Company's stockholders voted to approve the 2008 Stock Incentive Plan ("SIP"), with 625,000 shares of Common Stock available to be issued. At the Annual Stockholder meeting on September 22, 2011 the Company's stockholders voted to approve an increase to the shares of Common Stock issuable under the SIP by 125,000 to 750,000. Under the terms of the SIP, the Compensation Committee of the Company's Board has the discretion to select the persons to whom awards are to be granted. Awards can be stock options, restricted stock and/or restricted stock units. The awards become vested at such times and under such conditions as determined by the Compensation Committee. As of December 31, 2014, there were 336,826 options exercised, 355,251 options outstanding and 57,923 options still available to be issued under the SIP.

Effective June 19, 2014, the Company's stockholders voted to approve the 2014 Stock Incentive Plan ("SIP14"), with 800,000 shares of Common Stock available to be issued. Under the terms of the SIP14, the Compensation Committee of the Company's Board has the discretion to select the persons to whom awards are to be granted. Awards can be stock options, restricted stock and/or restricted stock units. The awards become vested at such times and under such conditions as determined by the Compensation Committee. As of December 31, 2014, there were no options exercised, 129,750 options outstanding and 670,250 options still available to be issued under the SIP14.

The Company's results for the years ended December 31, 2014 and 2013 include stock-based compensation expense totaling $447,100 and $332,000, respectively. Such amounts have been included in the Consolidated Statements of Operations within cost of goods sold ($700 and $78,000, respectively), research and development ($44,500 and $106,000, respectively) and selling, general and administrative expenses ($401,900 and $148,000, respectively). In accordance with ASC 718 the Company has not recorded a deferred tax asset related to the net operating losses resulting from the exercise of disqualifying stock options in the accompanying financial statements. The cumulative amount of unrecognized tax benefits at December 31, 2014 was immaterial, and if the Company is able to utilize this benefit in the future it would result in a credit to additional paid-in capital.

Stock option compensation expense in the years ended December 31, 2014 and 2013 represents the estimated fair value of options outstanding which is being amortized on a straight-line basis over the requisite vesting period of the entire award.

The weighted average estimated fair value of stock options granted in the years ended December 31, 2014 and 2013 was $3.52 and $3.99 per share, respectively. The fair value of options at the date of grant was estimated using the Black-Scholes option pricing model. The expected volatility is based upon historical volatility of our stock and other contributing factors. The expected term is based on the Company's historical experience with similar type options.

The weighted-average assumptions made in calculating the fair values of options are as follows:

	For the years ended
	December 31, 2014	December 31, 2013
Expected term (in years)	4.5-6.3	4-5
Expected volatility	61.50-96.10%	99.60-115.77%
Expected dividend yield	n/a	n/a
Risk-free interest rate	.83-1.52%	.34-0.34%

The Company granted 379,750 new options during the year ended December 31, 2014 to employees at an average exercise price of $3.52 per share.

The following table provides stock options activity for the year ended December 31, 2014:

Stock Options	Number of Shares		Weighted Average Exercise Price per Share		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding at December 31, 2013		656,398	$	2.57	1.65 years	$	801,888

Granted		379,750	$	3.52
Exercised		318,750	$	1.04		$	341,729
Forfeited/expired/cancelled		25,529	$	3.17
Outstanding at December 31, 2014		691,869	$	3.66	3.97 years	$	334,636

Exercisable at December 31, 2014		265,619	$	3.67	1.94 years	$	158,149

The following table summarizes information about stock options outstanding at December 31, 2014:

	Stock Options Outstanding						Stock Options Exercisable
Range of Exercise Prices	Shares	Average Remaining Contract Life (Year)	Weighted Average Exercise Price		Aggregate Intrinsic Value		Shares	Weighted Average Exercise Price		Aggregate Intrinsic Value
$ 0.000 to 3.500	475,000	4.50	$	3.21	$	332,500	131,250	$	2.71	$	157,500
3.501 to 4.500	153,744	2.54		4.28		-	103,244		4.24		-
4.501 to 8.000	75,625	2.90		5.30		-	43,625		5.28		-
Total	704,369	3.90	$	3.67	$	332,500	278,119	$	3.68	$	157,500

As of December 31, 2014, there was $631,000 of net unrecognized compensation cost related to stock options that are not vested, which is expected to be recognized over a weighted average period of approximately 2.38 years. The total fair value of shares vested during the years ended December 31, 2014 and 2013, was $283,000 and $118,000, respectively.