Note 4. Stock-Based Compensation

Following the guidance of FASB ASC 718-10-30, Compensation - Stock Compensation, stock-based compensation is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the requisite employee service period (generally the vesting period of the grant).

The Company measures the compensation cost associated with share-based payments by estimating the fair value of stock options as of the grant date using the Black-Scholes option pricing model. The Company believes that the valuation technique and the approach utilized to develop the underlying assumptions are appropriate in calculating the fair values of the Company's stock options granted during all years presented. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by the employees who receive equity awards.

Our net loss for the nine months ended June 30, 2011 and June 30, 2010 includes $46,000 and $66,000, respectively, of compensation costs related to our stock-based compensation arrangements.

During the nine months ended June 30, 2011, we granted 4,000 non-statutory stock options and 53,233 incentive stock options with exercise prices of $1.56. The per-share weighted average fair value was $1.26 for both the non-statutory stock option grants and incentive stock option grants.

In addition to the exercise and grant date prices of the awards, certain weighted average assumptions that were used to estimate the fair value of stock option grants are listed in the following table:

	Incentive Stock Options	Non-Statutory Stock Options
Expected term (years)	6.5	6.7
Expected volatility	98.54%	97.35%
Risk-free interest rate	2.46%	2.52%
Expected dividends	0	0

We estimate expected volatility based on historical weekly price changes of our common stock for a period equal to the current expected term of the options. The risk-free interest rate is based on the United States treasury yields in effect at the time of grant corresponding with the expected term of the options. The expected option term is the number of years we estimate that options will be outstanding prior to exercise considering vesting schedules and our historical exercise patterns.

A summary of stock option activity under our share-based compensation plan for the nine months ended June 30, 2011 is presented in the following table: (The numbers of options and the exercise prices shown in this table have been adjusted to effect the one for three reverse stock split that occurred on December 31, 2010.)

	Options			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Yrs.)		Aggregate Intrinsic Value
Outstanding-beg of year		130,027		$	9.89
Granted		57,233		$	1.56
Exercised		-
Forfeited		(19,371	)	$	11.62
Expired		( 1,200	)	$	4.14
Outstanding Jun 30, 2011		166,689		$	6.87		6.2	$	5,000

Exercisable Jun 30, 2011		80,819		$	11.38		3.5	$	0

As of June 30, 2011, the total remaining unrecognized compensation cost related to unvested stock-based arrangements was $70,000 and is expected to be recognized over a period of 2.5 years.

There were no stock options exercised during the nine months ended June 30, 2011.