Restricted Stock Awards

The Company maintains its 2003 Amended and Restated 2003 Stock Plan (“2003 Plan”), which has been approved by the Company’s stockholders, for the issuance of stock-based compensation awards. As amended, the Company is permitted to issue an aggregate of 340,000 shares of common stock under the plan. All Company personnel and contractors are eligible to participate in the plan.

In September 2011, in an effort to preserve cash, the Board, after consultation with the Compensation Committee, entered into an agreement to compensate the members of the Board for their monthly retainer and other services as directors and/or members of the Board’s various standing committees through the award of shares of the Company’s common stock under the 2003 Plan. Since inception an aggregate of 57,011 shares were issued to members of the Board of Directors. No restricted shares were issued during the year ended September 30, 2012.

As of September 30, 2012, there were 108,134 shares authorized under the 2003 Plan that were granted and remain outstanding, of which 107,871 have vested and 263 are in the form of restricted stock. These shares of restricted stock were granted to the Company’s service providers, officers and directors. All unvested restricted shares vest on a cliff basis 10 years from the date of grant. Certain market performance criteria may accelerate the vesting of a portion of these awards if the stock price exceeds $50 per share.

The following table sets forth the activity with respect to unvested restricted stock grants (results reported in post-split amounts):

During the years ended September 30, 2012 and 2011 the Company recognized compensation expense of $16,942 and $38,231 respectively, under the 2003 Plan and other restricted stock issuances. Due to the immateriality of the remaining expense, all expense associated with nonvested awards (net of forfeitures of 70% for awards vesting in 2013 and 0% for awards vesting in October 2011) was recognized during the year ended September 30, 2011. No further expense associated with unvested awards is expected unless the Company’s actual forfeiture rate differs from its expected forfeiture rate, in which the Company could incur up to $35,417 of additional expense.

Stock Option Awards

From time to time, the Company grants stock option awards to officers and employees. Such awards are valued based on the grant date fair value of the instruments, net of estimated forfeitures, using a Black-Scholes option pricing model with the following assumptions:

The volatility used was based on historical volatility of the Company’s common stock, which management considers to be the best indicator of expected future volatility. The risk free interest rate was determined based on treasury securities with maturities equal to the expected term of the underlying award. The expected term was determined based on the simplified method outlined in Staff Accounting Bulletin No. 110.

As discussed in Note 10, on March 24, 2011, Mr. Hall was granted an option to purchase 13,487 shares of the Company’s common stock at an exercise price of $3.53 per share, which was equal to the closing price of the Company’s common stock on the date of grant. The option was granted pursuant to the Company’s 2003 Stock Plan and vested according to the following schedule: 25% on March 24, 2012 (the first anniversary of the grant date) and 1/36 of the remainder each month beginning on April 24, 2012. The grant date fair value of this award was $19,833 based on a Black-Scholes option pricing model described above and was expensed on a straight-line basis over the vesting period. On January 13, 2012, the employment of Mr. Hall was terminated. Pursuant to the terms of his employment with the Company, the termination resulted in the forfeiture of all 13,487 of his unvested stock options.

On May 20, 2011, Mr. Tomsic was granted an option to purchase 10,526 shares of the Company’s common stock at an exercise price of $3.77 per share, which was equal to the closing price of the Company’s common stock on the date of grant. The options vested and became exercisable according to the following schedule: 3,728 options vested immediately and the remainder vested 1/31 at the end of each month thereafter over the next 31 months so long as Mr. Tomsic continues to provide services to the Company. The grant date fair value of this award was $21,446 using a Black-Scholes option pricing model described above, with $11,218 expensed on grant date and the remaining amount being expensed on a straight-line basis over the vesting period. On May 20, 2012, the employment of Larry Tomsic terminated. The Company agreed to accelerate the vesting of Mr. Tomsic’s existing options. In accordance with provisions of the option agreements, all of his options lapsed due to not being exercised within 90 days of the termination date.

Stock option awards are expensed on a straight-line basis over the requisite service period. During the years ended September 30, 2012 and 2011, the Company recognized expense of $16,942 and $38,231, respectively, associated with stock option awards. At September 30, 2012, all stock compensation expense associated with issued awards has been recognized.

The following summarizes stock option activity for the year ended September 30, 2012:

As of September 30, 2012, 231,866 shares remained available for issuance under the 2003 Plan.