(3) Stock-Based Compensation

Stock Option Plans

As of December 31, 2011, we had 258,291 shares of common stock available for future grant to employees, consultants and key suppliers under our 2002 Equity Incentive Plan ("Plan"). Under the Plan, the exercise price of each option is set at the fair value of the common stock on the date of grant and the maximum term of the option is 10 years from the date of grant. Options granted to employees generally vest ratably over a three-year period. The maximum number of shares that may be granted as options to an employee under the Plan in any calendar year is 500,000. Forfeitures under the Plan are available for re-issuance at any time prior to expiration of the Plan in 2013. Options granted under the Plan to employees require the option holder to abide by certain Company policies, which restrict their ability to sell the underlying common stock. Prior to the adoption of the Plan, we issued stock options under our 1992 Incentive and Non-Qualified Option Plan, which expired by its terms in 2002. Forfeitures under the 1992 Incentive and Non-Qualified Option Plan may not be re-issued.

Non-Employee Director Stock Option Plan

In February 1994 our Board of Directors ratified a Stock Option Plan for Non-Employee Directors ("Directors Plan") pursuant to which Directors may elect to receive stock options in lieu of cash compensation for their services as directors. As of December 31, 2011, we had no shares of common stock available for future grant under the Directors Plan. Option terms range from 3 to 10 years from the date of grant. Option exercise prices are equal to the fair value of the common shares on the date of grant. Options granted under the plan generally vest immediately. Forfeitures under the Directors Plan are available for re-issuance at a future date.

Stock Purchase Plan

We have established a Stock Purchase Plan under which eligible employees may contribute up to 10 percent of their compensation to purchase shares of our common stock at 85 percent of the fair market value at specified dates. At December 31, 2011 we had 485,282 shares of common stock available for issuance under the Stock Purchase Plan. During the quarters and nine month periods ended December 31, 2011 and 2010, we issued zero and 11,497, and zero and 277 shares of common stock, respectively, under the Stock Purchase Plan. Cash received by us upon the purchase of shares under the Stock Purchase Plan for the quarters and nine month periods ended December 31, 2011 and 2010 was zero and $22,994, and zero and $1,006, respectively, and is included in cash provided by financing activities.

Stock Bonus Plan

We have a Stock Bonus Plan ("Stock Plan") administered by the Board of Directors. At December 31, 2011 there were 550,320 shares of common stock available for future grant under the Stock Plan. Under the Stock Plan, shares of common stock may be granted to employees and key consultants as additional compensation for services rendered. Vesting requirements for grants under the Stock Plan, if any, are determined by the Board of Directors at the time of grant. There were zero and 213,398 shares granted under the Stock Plan during both the quarter and nine month period ended December 31, 2011 and 7,903 and 243,076 shares granted under the Stock Plan during both the quarter and nine month period ended December 31, 2010.

We use the straight-line attribution method to recognize share-based compensation costs over the requisite service period of the award. Options granted by us generally expire ten years from the grant date. Options granted to existing and newly hired employees generally vest over a three-year period from the date of the grant. The exercise price of options is equal to the market price of our common stock (defined as the closing price reported by the NYSE Amex) on the date of grant.

We use the Black-Scholes-Merton option pricing model for estimating the fair value of stock option awards. The table below shows total share-based compensation expense for the quarters and nine month periods ended December 31, 2011 and 2010 and the classification of these expenses:

	Quarter Ended December 31,		Nine Months Ended December 31,
	2011	2010	2011	2010
Costs of contract services	$ 4,523	22,077	13,309	63,547
Costs of product sales	29,313	27,230	72,174	77,693
Research and development	231	1,684	369	15,280
Production engineering	45,729	24,876	143,755	76,084
Selling, general and administrative	38,419	200,028	538,233	899,460
	$ 118,215	275,895	767,840	1,132,064

Share-based compensation capitalized in inventories was insignificant in the quarters and nine month periods ended December 31, 2011 and December 31, 2010.

We adjust share-based compensation on a quarterly basis for changes to the estimate of expected equity award forfeitures based on actual forfeiture experience. The effect of adjusting the forfeiture rate for all expense amortization is recognized in the period the forfeiture estimate is changed. The effect of forfeiture adjustments in the quarters and nine month periods ended December 31, 2011 and December 31, 2010 were insignificant.

All shares granted under the Director's Plan are vested.

A summary of the status of non-vested shares under the 2002 Equity Incentive Plan as of December 31, 2011 and 2010 and changes during the quarters and nine month periods ended December 31, 2011 and 2010 are presented below:

	Nine Months Ended December 31, 2011		Nine Months Ended December 31, 2010
		Weighted-Average		Weighted-Average
	Shares	Grant Date	Shares	Grant Date
	Under Option	Fair Value	Under Option	Fair Value
Non-vested at April 1	475,934	$ 1.73	338,747	$ 1.93
Granted	-	$ -	-	$ -
Vested	-	$ -	-	$ -
Forfeited	(3,610)	$ 1.79	(1,832)	$ 1.61
Non-vested at June 30	472,324	$ 1.73	336,915	$ 1.94
Granted	389,588	$ 1.68	510,132	$ 1.37
Vested	(149,126)	$ 1.41	(297,594)	$ 1.21
Forfeited	(931)	$ 1.61	-	$ -
Non-vested at September 30	711,855	$ 1.77	549,453	$ 1.80
Granted	25,000	$ 1.12	-	$ -
Vested	(64,435)	$ 2.38	(64,435)	$ 2.38
Forfeited	(1,985)	$ 1.61	(7,119)	$ 1.58
Non-vested at December 31	670,435	$ 1.69	477,899	$ 1.73

As of December 31, 2011, there was $748,644 of total unrecognized compensation costs related to stock options granted under the 2002 Equity Incentive Plan. The unrecognized compensation cost is expected to be recognized over a weighted-average period of 26 months. The total fair value of stock options that vested during the quarter and nine month period ended December 31, 2011 was $153,658 and $363,239. The total fair value of stock options that vested during both the quarter and nine month period ended December 31, 2010 was $153,658 and $512,720. There were options to acquire 25,000 and 414,588 shares granted under the Equity Incentive Plan during the quarter and nine month period ended December 31, 2011 and there were options to acquire zero and 510,132 shares granted under the Equity Incentive Plan during both the quarter and nine month period ended December 31, 2010.

A summary of the non-vested shares under the Stock Bonus Plan as of December 31, 2011 and 2010 and changes during the quarters and nine month periods ended December 31, 2011 and 2010 are presented below:

	Nine Months Ended December 31, 2011		Nine Months Ended December 31, 2010
		Weighted-Average		Weighted-Average
	Shares	Grant Date	Shares	Grant Date
	Under Contract	Fair Value	Under Contract	Fair Value
Non-vested at April 1	62,199	$ 2.50	98,929	$ 2.97
Granted	-	$ -	-	$ -
Vested	-	$ -	-	$ -
Forfeited	-	$ -	-	$ -
Non-vested at June 30	62,199	$ 2.50	98,929	$ 2.97
Granted	213,398	$ 2.34	235,173	$ 2.51
Vested	(107,917)	$ 2.28	(139,767)	$ 2.57
Forfeited	-	$ -	-	$ -
Non-vested at September 30	167,680	$ 2.44	194,335	$ 2.70
Granted	-	$ -	7,903	$ 1.92
Vested	-	$ -	(140,039)	$ 2.74
Forfeited	-	$ -	-	$ -
Non-vested at December 31	167,680	$ 2.44	62,199	$ 2.50

As of December 31, 2011, there was $321,513 of total unrecognized compensation costs related to common stock granted under our Stock Bonus Plan. The unrecognized compensation cost at December 31, 2011 is expected to be recognized over a weighted-average period of 28 months. The total fair value of common stock granted under the Stock Bonus Plan that vested during both the quarter and nine month period ended December 31, 2011 was zero and $245,745 and the total fair value of common stock granted under the Stock Bonus Plan that vested during both the quarter and nine month period ended December 31, 2010 was $383,667 and $743,454.

Expected volatility is based on historical volatility. The expected life of options granted is based on historical experience.

Additional information with respect to stock option activity during the quarter and nine month periods ended December 31, 2011 under our 2002 Equity Incentive Plan is as follows:

			Weighted
		Weighted	Average
	Shares	Average	Remaining	Aggregate
	Under	Exercise	Contractual	Intrinsic
	Option	Price	Life	Value
Outstanding at April 1, 2011	2,630,491	$ 3.00	3.7 years	$ 959,001
Granted	-	$ -
Exercised	-	$ -		$ -
Forfeited	(6,309)	$ 3.08
Outstanding at June 30, 2011	2,624,182	$ 3.00	3.5 years	$ 39,661
Granted	389,588	$ 2.40
Exercised	-	$ -		$ -
Forfeited	(35,931)	$ 3.54
Outstanding at September 30, 2011	2,977,839	$ 2.92	4.1 years	$ -
Granted	25,000	$ 2.10
Exercised	-	$ -		$ -
Forfeited	(1,985)	$ 2.40

Outstanding at December 31, 2011	3,000,854	$ 2.91	3.9 years	$ -

Exercisable at December 31, 2011	2,330,419	$ 2.99	2.7 years	$ -

Vested and expected to vest at December 31, 2011	2,960,329	$ 2.92	3.8 years	$ -

Additional information with respect to stock option activity during the quarter and nine month periods ended December 31, 2010 under our 2002 Equity Incentive Plan is as follows:

			Weighted
		Weighted	Average
	Shares	Average	Remaining	Aggregate
	Under	Exercise	Contractual	Intrinsic
	Option	Price	Life	Value

Outstanding at April 1, 2010	2,377,075	$ 3.45	3.9 years	$ 2,509,155
Granted	-	$ -
Exercised	(1,000)	$ 3.57		$ 600
Forfeited	(3,166)	$ 3.57
Outstanding at June 30, 2010	2,372,909	$ 3.45	3.7 years	$ 1,264,435
Granted	510,132	$ 2.52
Exercised	-	$ -		$ -
Forfeited	(6,334)	$ 3.59
Outstanding at September 30, 2010	2,876,707	$ 3.28	4.0 years	$ 328,687
Granted	-	$ -
Exercised	-	$ -		$ -
Forfeited	(7,119)	$2.37

Outstanding at December 31, 2010	2,869,588	$ 3.29	3.7 years	$ 74,736

Exercisable at December 31, 2010	2,391,689	$ 3.34	3.1 years	$ 58,346

Vested and expected to vest at December 31, 2010	2,844,869	$ 3.29	3.7 years	$ 73,875

Additional information with respect to stock option activity during the quarter and nine month periods ended December 31, 2011 under our Director's Plan is as follows:

			Weighted
		Weighted	Average
	Shares	Average	Remaining	Aggregate
	Under	Exercise	Contractual	Intrinsic
	Option	Price	Life	Value
Outstanding at April 1, 2011	329,786	$ 2.86	3.1 years	$ 129,642
Granted	-	$ -
Exercised	-	$ -		$ -
Forfeited		$ -
Outstanding at June 30, 2011	329,786	$ 2.86	2.9 years	$ 9,734
Granted	155,122	$ 2.04
Exercised	-	$ -		$ -
Forfeited	(25,996)	$ 2.33
Outstanding at September 30, 2011	458,912	$ 2.61	3.7 years	$ -
Granted	-	$ -
Exercised	-	$ -		$ -
Forfeited	(13,158)	$ 3.40

Outstanding at December 31, 2011	445,754	$ 2.59	3.6 years	$ -

Exercisable at December 31, 2011	445,754	$ 2.59	3.6 years	$ -

Vested and expected to vest at December 31, 2011	445,754	$ 2.59	3.6 years	$ -

Additional information with respect to stock option activity during the quarter and nine month periods ended December 31, 2010 under our Director's Plan is as follows:

			Weighted
		Weighted	Average
	Shares	Average	Remaining	Aggregate
	Under	Exercise	Contractual	Intrinsic
	Option	Price	Life	Value

Outstanding at April 1, 2010	256,653	$ 3.15	2.6 years	$ 303,651
Granted	-	$ -
Exercised	-	$ -		$ -
Forfeited	(977)	$ 7.63
Outstanding at June 30, 2010	255,676	$ 3.13	2.4 years	$ 143,003
Granted	100,136	$ 2.63
Exercised	-	$ -		$ -
Forfeited	(24,039)	$ 3.57
Outstanding at September 30, 2010	331,773	$ 2.96	3.3 years	$ 45,771
Granted	19,697	$ 1.92
Exercised	-	$ -		$ -
Forfeited	(21,684)	$ 3.40

Outstanding at December 31, 2010	329,786	$ 2.86	3.4 years	$ 14,384

Exercisable at December 31, 2010	329,786	$ 2.86	3.4 years	$ 14,384

Vested and expected to vest at December 31, 2010	329,786	$ 2.86	3.4 years	$ 14,384

Cash received by us upon the exercise of stock options for both the quarter and nine month period ended December 31, 2011 was zero. Cash received by us upon the exercise of stock options for the quarter and nine month period ended December 31, 2010 was zero and $3,570, respectively. The source of shares of common stock issuable upon the exercise of stock options is from authorized and previously unissued common shares.