5. Inventory

Inventories are stated at the lower of cost or net realizable value, and net of a valuation allowance for potential excess or obsolete material. Cost is determined using the average cost method. Depreciation related to manufacturing is systematically allocated to inventory produced, and expensed through cost of goods sold at the time inventory is sold.

Inventories consist of the following:



	April 30,		July 31,
	2013		2012
Raw materials	$	423,000	$	476,000
Finished goods		358,000		178,000
	$	781,000	$	654,000

During the nine months ended April 30, 2013, we increased our inventory balance by $207,000 to reflect product held by a third party warehouse on behalf of one of our customers. We retook possession of this inventory, and as such, we reduced our accounts receivable by $273,000 and reduced deferred revenue by $66,000.

During the three months ended April 30, 2013, we received $35,000 from the sale of silver held in inventory. At the time of sale, the silver had a book value of $22,000. The corresponding $13,000 gain is reflected in the other income (expense) section of the consolidated statements of operations.