Stock-Based Compensation

3 Months Ended

Sep. 30, 2011

NOTE 5 – STOCK-BASED COMPENSATION

The effect of recording stock-based compensation for the three months ended September 30, 2011 and 2010 was as follows:

	Three Months Ended September 30,
	2011	2010
Stock-based compensation expense by type of award:
Employee stock options	$ –	$ 40,451
Employee restricted stock units	–	27,690
Non-employee director restricted stock units	–	15,708
Amounts capitalized as inventory	–	(1,092)
Total stock-based compensation expense	$ –	$ 82,757
Tax effect of stock-based compensation recognized	–	(26,815)
Net effect on net loss	$ –	$ 55,942

As of September 30, 2011, the unrecorded deferred stock-based compensation balance was $0 after estimated forfeitures.

During the three months ended September 30, 2011, the Company did not grant any stock options or shares of restricted stock. During the three months ended September 30, 2010, the Company granted 100,002 stock options with a grant date fair value of $12,780 after estimated forfeitures. During the three months ended September 30, 2010, the Company granted 50,000 shares of restricted stock with a grant date fair value of $14,982 after estimated forfeitures.

Valuation Assumptions

The Company estimates the fair value of stock options using a Black-Scholes option-pricing model. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model and the straight-line attribution approach with the following weighted-average assumptions:

	Three Months Ended September 30,
	2011 (a)	2010
Risk-free interest rate	–	1.7%
Dividend yield	–	0.0%
Expected stock price volatility	–	64%
Average expected life of options	–	4.8 years

(a) No stock options were granted during the three months ended September 30, 2011.

Authoritative guidance issued by the FASB requires the use of option pricing models that were not developed for use in valuing employee stock options. The Black-Scholes option-pricing model was developed for use in estimating the fair value of short-lived exchange traded options that have no vesting restrictions and are fully transferable. In addition, option-pricing models require the input of highly subjective assumptions, including the option's expected life and the price volatility of the underlying stock. For the three months ended September 30, 2010, the expected stock price volatility assumption was determined using the Company's historic volatility.

The Company uses the simplified method suggested by the SEC in authoritative guidance for determining the expected life of the options. Under this method, the Company calculates the expected term of an option grant by averaging its vesting and contractual term. Based on studies of the Company's historic actual option terms, compared with expected terms predicted by the simplified method, the Company has concluded that the simplified method yields materially accurate expected term estimates. The Company estimates its applicable risk-free rate based upon the yield of U.S. Treasury securities having maturities similar to the estimated term of an option grant, adjusted to reflect its continuously compounded "zero-coupon" equivalent.

Equity Incentive Program

The Company's equity incentive program is a broad-based, long-term retention program that is intended to attract and retain qualified management and technical employees, and align stockholder and employee interests. The equity incentive program presently consists of three plans (the "Plans"): the Company's 1998 Incentive Plan, as Amended and Restated (the "1998 Plan"); the Company's 2006 Stock Incentive Plan, as Amended and Restated (the "2006 Plan"); and the Company's 2009 Stock Incentive Plan (the "2009 Plan"). Under these Plans, non-employee directors, officers, key employees, consultants and all other employees may be granted options to purchase shares of the Company's stock, restricted stock units and other types of equity awards. Under the equity incentive program, stock options generally have a vesting period of three to five years, are exercisable for a period not to exceed ten years from the date of issuance and are not granted at prices less than the fair market value of the Company's common stock at the grant date. Restricted stock units may be granted with varying service-based vesting requirements.

Under the Company's 1998 Plan, 1,000,000 common shares were authorized for issuance through awards of options or other equity instruments. An aggregate of 323,385 shares were issued under the plan, and options to purchase 181,398 shares were outstanding at September 30, 2011. The 1998 Plan expired on June 17, 2008, and no further awards may be made under the plan. Under the Company's 2006 Plan, 1,000,000 common shares are authorized for issuance through awards of options or other equity instruments. As of September 30, 2011, 316,227 common shares were available for future issuance under the 2006 Plan. Under the Company's 2009 Plan, 1,250,000 common shares are authorized for issuance through awards of options or other equity instruments. As of September 30, 2011, 187,998 common shares were available for future issuance under the 2009 Plan.

The following table summarizes the combined stock option plan and non-plan activity for the indicated periods:

	Number of Shares	Weighted Average Exercise Price
Balance outstanding at June 30, 2011	493,999	$3.23
Three months ended September 30, 2011:
Options granted	–	–
Options exercised	–	–
Options cancelled/expired/forfeited	(52,768)	2.45
Balance outstanding at September 30, 2011	441,231	$3.32

The options outstanding and exercisable at September 30, 2011 were in the following exercise price ranges:

	Options Outstanding			Options Exercisable
Range of Exercise Prices	Number Outstanding	Weighted Average Remaining Contractual Life-Years	Weighted Average Exercise Price	Number Vested and Exercisable	Weighted Average Exercise Price

$0.50 to $0.85	11,000	1.6	$0.73	11,000	$0.73
$1.15 to $2.00	104,488	2.4	1.92	104,488	1.92
$2.01 to $6.30	325,743	3.5	3.85	325,743	3.85
	441,231	3.2	$3.32	441,231	$3.32

At September 30, 2011, none of the Company's exercisable options were in-the-money. Accordingly, all outstanding and exercisable options at that date had no aggregate intrinsic value. No options were exercised during the three months ended September 30, 2011.

The weighted average grant date fair value of options granted during the three months ended September 30, 2011 was $0, as no stock options were granted. The weighted average grant date fair value of options granted during the three months ended September 30, 2010 was $0.21.

The Company settles employee stock option exercises with newly issued common shares.

Restricted Stock Units

During the three months ended September 30, 2011, the Company's Board of Directors did not approve any new grants of restricted stock.

As of September 30, 2011, there was $0 of total unrecognized deferred stock-based compensation after estimated forfeitures related to non-vested restricted stock units granted under the Plans.

- 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.

+ References

Reference 1: http://www.xbrl.org/2003/role/presentationRef

-Publisher FASB

-Name Accounting Standards Codification

-Topic 718

-SubTopic 10

-Section 50

-Paragraph 4

-URI http://asc.fasb.org/extlink&oid=6415400&loc=d3e5444-113901

Reference 2: http://www.xbrl.org/2003/role/presentationRef

-Publisher AICPA

-Name Statement of Position (SOP)

-Number 93-6

-Paragraph 53

-LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy.

Reference 3: http://www.xbrl.org/2003/role/presentationRef

-Publisher SEC

-Name Staff Accounting Bulletin (SAB)

-Number Topic 14

Reference 4: http://www.xbrl.org/2003/role/presentationRef

-Publisher FASB

-Name Statement of Financial Accounting Standard (FAS)

-Number 123R

-Paragraph 64, 65, A240

-LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy.

Reference 5: http://www.xbrl.org/2003/role/presentationRef

-Publisher FASB

-Name Accounting Standards Codification

-Topic 718

-SubTopic 40

-Section 50

-Paragraph 1

-URI http://asc.fasb.org/extlink&oid=6418621&loc=d3e17540-113929

Reference 6: http://www.xbrl.org/2003/role/presentationRef

-Publisher FASB

-Name Accounting Standards Codification

-Topic 718

-SubTopic 10

-Section 50

-Paragraph 1

-URI http://asc.fasb.org/extlink&oid=6415400&loc=d3e5047-113901

Reference 7: http://www.xbrl.org/2003/role/presentationRef

-Publisher FASB

-Name Accounting Standards Codification

-Topic 505

-SubTopic 50

-Section 50

-Paragraph 1

-URI http://asc.fasb.org/extlink&oid=6406099&loc=d3e25284-112666

Reference 8: http://www.xbrl.org/2003/role/presentationRef

-Publisher FASB

-Name Accounting Standards Codification

-Topic 718

-SubTopic 10

-Section 50

-Paragraph 2

-URI http://asc.fasb.org/extlink&oid=6415400&loc=d3e5070-113901

+ Details

MEDIA SCIENCES INTERNATIONAL INC 10-Q