2.         STOCK BASED COMPENSATION

We maintain stock equity incentive plans under which we may grant non-qualified stock options, stock appreciation rights, stock awards, performance awards, or stock units to employees, directors and consultants.

Stock Option Compensation Expense

We account for stock options granted to employees and directors using the accounting guidance in ASC 718 “Stock Compensation” (“ASC 718”).  In accordance with ASC 718, we estimate the fair value of stock options granted on the date of grant using the Black-Scholes pricing model.  We recognize compensation expense for stock option awards on a straight-line basis over the requisite service period of the grant.  We recorded stock-based compensation expense, related to stock options granted to employees and directors, of approximately $111,000 and $643,000, during the nine-month periods ended July 31, 2012 and 2011, respectively, and approximately $-0- and $334,000 during the three-month periods ended July 31, 2012 and 2011, respectively.  Such compensation expense is included in the accompanying condensed consolidated statements of operations in either research and development expenses or selling, general and administrative expenses, as applicable based on the functions performed by such employees and directors.   

Included in stock based compensation cost related to stock options granted to employees and directors recorded during the nine-month periods ended July 31, 2012 and 2011 was approximately $5,000 and $8,000, respectively, and during the three-month periods ended July 31, 2012 and 2011 was approximately $2,000 and $4,000, respectively, of expense related to the amortization of compensation cost for stock options granted in prior periods but not yet vested.  As of July 31, 2012, there was approximately $2,000 of unrecognized compensation cost related to non-vested share-based compensation arrangements for stock options granted to employees and directors which is expected to be amortized during the current fiscal year.

We account for stock options granted to consultants using the accounting guidance under ASC 505-50 “Equity-Based Payments to Non-Employees” (“ASC 505-50”).  In accordance with ASC 505-50, we estimate the fair value of stock options granted on the date of grant using the Black-Scholes pricing model.  We recognized consulting expense for options granted to non-employee consultants, during the nine-month periods ended July 31, 2012 and 2011 of approximately $-0- and $44,000, respectively, and during the three-month periods ended July 31, 2012 and 2011, of $-0-. Such consulting expense is included in the accompanying condensed consolidated statements of operations in either research and development expenses or selling, general and administrative expenses, as applicable based on the functions performed by such consultants.  As of July 31, 2012, there was no unrecognized consulting expense related to non-vested share-based compensation arrangements for stock options granted to consultants.

Fair Value Determination 

We separate the employees and directors we grant stock options to into three relatively homogenous groups, based on exercise and post-vesting employment termination behaviors.  To determine the weighted average fair value of stock options on the date of grant for options granted to employees and directors, we take a weighted average of the assumptions used for each of these groups.  The fair value of stock options granted to consultants is determined on an individual basis.  Stock options we granted during the nine-months ended July 31, 2012 and 2011 consisted of awards of options with 10-year terms which vested immediately.  

The following weighted average assumptions were used in estimating the fair value of stock options granted during the nine months ended July 31, 2012 and 2011and the three months ended July 31, 2011. No stock options were granted during the three months ended July 31, 2012.

The expected term of stock options represents the weighted average period the stock options are expected to remain outstanding.  Actual historical performance is used for awards exercised or cancelled.  For awards that remain unexercised and outstanding, even exercise over the remaining contractual term is assumed.  Each category is weighted for its relative size in the population and is then multiplied by the indicated expected term for each category to arrive at the expected term for the population.  We estimated the expected volatility of our shares of common stock based upon the historical volatility of our share price over a period of time equal to the expected term of the options.  We estimated the risk-free interest rate based on the implied yield available on the applicable grant date of a U.S. Treasury note with a term equal to the expected term of the underlying grants.  We made the dividend yield assumption based on our history of not paying dividends and our expectation not to pay dividends in the future.  Under ASC 718, the amount of stock-based compensation expense recognized is based on the portion of the awards that are ultimately expected to vest.  Accordingly, we reduce the fair value of the stock option awards for expected forfeitures, which are forfeitures of the unvested portion of surrendered options.  We estimated expected forfeitures based on our historical experience.

We will reconsider use of the Black-Scholes pricing model if additional information becomes available in the future that indicates another model would be more appropriate, or if grants issued in future periods have characteristics that cannot be reasonably estimated using this model.  If factors change and we employ different assumptions in the application of ASC 718 and ASC 505-50 in future periods, the compensation expense that we record may differ significantly from what we have recorded in the current period.

Stock Option Activity

During the nine-month periods ended July 31, 2012 and 2011, we granted options to purchase 1,290,000 shares and 4,125,000 shares, respectively, to employees, directors and consultants of common stock at weighted average exercise prices of $0.16 and $0.26 per share, respectively, pursuant to the CopyTele, Inc. 2010 Share Incentive Plan (the "2010 Share Plan”).  During the nine-month periods ended July 31, 2012 and 2011, stock options to purchase 1,290,000 shares and 4,670,000 shares, respectively, of common stock were exercised with aggregate proceeds of approximately $208,000 and $1,098,000, respectively.

Stock Option Plans

As of April 30, 2012, we have two stock option plans:  the CopyTele, Inc. 2003 Share Incentive Plan (the "2003 Share Plan"), and the 2010 Share Plan, which were adopted by our Board of Directors on April 21, 2003 and July 14, 2010, respectively. 

The remaining outstanding stock options granted under the CopyTele, Inc. 1993 Stock Option Plan and the CopyTele, Inc. 2000 Share Incentive Plan expired during fiscal years ended October 31, 2010 and 2011, respectively.

The 2003 Share Plan provides for the grant of nonqualified stock options, stock appreciation rights, stock awards, performance awards and stock units to key employees and consultants.  The maximum number of shares of common stock available for issuance under the 2003 Share Plan is 70,000,000 shares. The 2003 Share Plan was administered by the Stock Option Committee through June 2004, from June 2004 through July 2010, the 2003 Share Plan was administered by the Board of Directors and since July 2010, the 2003 Share Plan has been administered by the Stock Option Committee (and since August 21, 2012, by the Executive Committee which also assumed the duties of the Stock Option Committee), which determines the option price, term and provisions of each option.  The exercise price with respect to all of the options granted under the 2003 Share Plan since its inception was equal to the fair market value of the underlying common stock at the grant date. As of July 31, 2012, the 2003 Share Plan had 324,545 shares available for future grants. 

On September 5, 2012, the Executive Committee of the Board of Directors of the Company approved a re-pricing of options to purchase a total of 1,840,000 shares of the Company’s common stock granted under the Company’s 2003 Share Incentive Plan, which were granted from May 11, 2004 to October 8, 2009 with exercise prices ranging from $0.65 to $1.46 and are held by 11 persons, including nine employees, one employee director and one non-employee director.  Pursuant to the re-pricing, the option agreements were unilaterally amended by the Executive Committee to reduce the exercise price of each option to $0.145, which was the closing sales price of the Company’s common stock on September 4, 2012. The number of shares, the vesting commencement date and the length of the vesting period, and expiration period for each of these options were not altered.

Information regarding the 2003 Share Plan for the nine months ended July 31, 2012 is as follows:

The following table summarizes information about stock options outstanding under the 2003 Share Plan as of July 31, 2012:

The 2010 Share Plan provides for the grant of nonqualified stock options, stock appreciation rights, stock awards, performance awards and stock units to key employees and consultants.  The maximum number of shares of common stock available for issuance under the 2010 Share Plan was initially 15,000,000 shares. On July 6, 2011, the 2010 Share Plan was amended by our Board of Directors to increase the maximum number of shares of common stock that may be granted to 27,000,000 shares, and on August 29, 2012, the maximum number of shares of common stock that may be granted was further increased to 30,000,000 shares. Current and future non-employee directors are automatically granted nonqualified stock options to purchase up to 60,000 shares of common stock upon their initial election to the Board of Directors and 60,000 shares of common stock at the time of each subsequent annual meeting of our shareholders at which they are elected to the Board of Directors.  The 2010 Share Plan is administered by the Stock Option Committee (and since August 21, 2012, by the Executive Committee which also assumed the duties of the Stock Option Committee), which determines the option price, term and provisions of each option. The exercise price with respect to the options granted under the 2010 Share Plan was equal to the fair market value of the underlying common stock at the grant date.  As of July 31, 2012, the 2010 Share Plan had 473,270 shares available for future grants.

 Information regarding the 2010 Share Plan for the nine months ended July 31, 2012 is as follows:

The following table summarizes information about stock options outstanding under the 2010 Share Plan as of July 31, 2012:

Stock Awards

We account for stock awards granted to employees and consultants based on their grant date fair value, in accordance with ASC 718 and ASC 505-50, respectively.  During the nine-month periods ended July 31, 2012 and 2011, we issued 6,463,608 shares and 6,396,075 shares, respectively, of common stock to certain employees for services rendered, principally in lieu of cash compensation, pursuant to the 2010 Share Plan.  We recorded compensation expense for the nine-month periods ended July 31, 2012 and 2011, of approximately $861,000 and $1,313,000, respectively, and for the three-month periods ended July 31, 2012 and 2011 of approximately $337,000 and $353,000, respectively, for the shares of common stock issued to employees.  Such compensation expense is included in the accompanying condensed consolidated statements of operations in either research and development expenses or selling, general and administrative expenses, as applicable based on the functions performed by such employees and directors.   In addition, during the nine-month periods ended July 31, 2012 and 2011, we issued 304,910 shares and 345,794 shares, respectively, of common stock to consultants for services rendered pursuant to the 2010 Share Plan.  We recorded consulting expense for the nine-month periods ended July 31, 2012 and 2011 of approximately $40,000 and $84,000, and for the three-month periods ended July 31, 2012 and 2011 of approximately $-0- and $48,000, respectively for the shares of common stock issued to consultants.  Such consulting expense is included in the accompanying condensed consolidated statements of operations in either research and development expenses or selling, general and administrative expenses, as applicable based on the functions performed by such consultants.