Note 9 Share-Based Compensation

Stock Options

As of March 31, 2013, the Company had the following two shareholder approved stock plans under which shares were available for equity based awards: The 2005 Stock Option Plan (the “2005 Plan”) wherein 2,075,000 shares of common stock are reserved for issuance until the Plan terminates on August 21, 2015, and The Independent Director Stock Option and Stock Grant Plan (the “2004 Directors Plan”) wherein 200,000 shares of common stock are reserved for issuance until the plan terminates in 2014.

Under the 2005 Plan, eligible employees and certain independent consultants may be granted options to purchase shares of the Company’s common stock. The shares issuable under the 2005 Plan will either be shares of the Company’s authorized but previously unissued common stock or shares reacquired by the Company, including shares purchased on the open market. As of March 31, 2013, there were 411,478 shares available for grant under the 2005 Plan.

Under the 2004 Directors Plan, upon election to the Board of Directors at an annual stockholders meeting, a newly elected non-employee director will be granted a ten-year option to purchase 6,000 shares of the Company’s common stock. Options vest and become exercisable six months from the date of grant. In addition, on the date of each annual stockholders meeting, each non-employee director continuing in office is automatically issued 4,000 shares of the Company’s common stock, and an additional 1,000 shares to the director serving as Chairman of the Board, non-transferable for six months following the date of grant. As of March 31, 2013, there were 130,123 shares available for grant under the 2004 Directors Plan.

The following table presents shares authorized, available for future grant and outstanding under each of the Company’s plans:

	As of March 31, 2013
	Authorized	Available	Outstanding

2005 Plan	2,075,000	411,478	1,483,856
2004 Directors Plan	200,000	130,123	12,000
Total	2,275,000	541,601	1,495,856

All stock option grants made under the 2005 Plan and the 2004 Directors Plan were issued at exercise prices no less than the Company’s closing stock price on the date of grant. Options under the 2005 Plan and 2004 Directors Plan were determined by the Board of Directors or the Stock Option and Compensation Committee of the Board in accordance with the provisions of the respective plans. The terms of each option grant include vesting, exercise, and other conditions are set forth in a Stock Option Agreement evidencing each grant. No option can have a life in excess of ten (10) years. The Company records compensation expense for employee stock options based on the estimated fair value of the options on the date of grant using the Black-Scholes option-pricing model. The model requires various assumptions, including a risk-free interest rate, the expected term of the options, the expected stock price volatility over the expected term of the options, and the expected dividend yield. Compensation expense for employee stock options is recognized ratably over the vesting term. Compensation expense recognized for options issued under the 2005 Plan was $653,000, $407,000 and $47,000 for the years ended March 31, 2013, 2012 and 2011, respectively. Independent Director compensation expense of $77,000, $46,000 and $27,000 was recognized under the 2004 Directors Plan for the years ended March 31, 2013, 2012 and 2011, respectively. All stock-based compensation has been classified as General and Administrative expense in the consolidated statement of operations.

A summary of option activity under the Company’s stock plans for the years ended March 31, 2013, 2012 and 2011 is presented below:

Option Activity	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding at March 31, 2010	333,606		$	1.69	8.4 years	$	555,281
Granted	230,000		3.04
Exercised	(132,596	)	1.41
Forfeited or Expired	(4,360	)	2.12
Outstanding at March 31, 2011	426,650		$	2.49	8.8 years	$	395,693
Granted	922,516		3.87
Exercised	(37,800	)	1.82
Forfeited or Expired	(59,450	)	2.14
Expired	(750	)	4.20
Outstanding at March 31, 2012	1,251,166		$	3.54	9.0 years	$	8,243,956
Granted	258,000		6.30
Exercised	(9,970	)	2.34
Forfeited	(3,340	)	3.21
Outstanding at March 31, 2013	1,495,856		$	4.03	8.3 years	$	1,174,810
Exercisable at March 31, 2013	338,290		$	3.12	7.6 years	$	470,790

The aggregate intrinsic value in the table above is before applicable income taxes and represents the excess amount over the exercise price optionees would have received if all options had been exercised on the last business day of the period indicated, based on the Company’s closing stock price of $4.47 for such day. The total intrinsic value of stock options exercised during fiscal years 2013, 2012 and 2011 were $37,000, $147,000 and $264,000, respectively.

A summary of the Company’s non-vested options for the year ended March 31, 2013 is presented below:

Nonvested Options	Shares		Weighted Average Grant-Date Fair Value
Nonvested at March 31, 2012	1,109,066		$	2.57
Granted	258,000		4.35
Vested	(206,560	)	2.10
Forfeited	(2,940	)	2.14
Nonvested at March 31, 2013	1,157,566		$	3.05

The weighted average grant-date fair value of stock options granted during fiscal years 2013, 2012 and 2011 was $1,124,000, $2,528,000 and $487,000, respectively. The total grant-date fair values of stock options that vested during fiscal years 2013, 2012 and 2011 were $434,000, $234,000 and $66,000, respectively.

The following table summarizes the weighted average characteristics of outstanding stock options as of March 31, 2013:

	Outstanding Options				Exercisable Options
Range of Exercise Prices	Number of Shares	Remaining Life (Years)	Weighted Average Price		Number of Shares	Weighted Average Price
$ 1.60 - $3.70	450,210	7.4	$	2.92	262,370	$	2.82
$ 3.71 - $4.42	732,646	8.4	3.82		56,920	3.82
$ 4.43 - $5.40	77,500	8.9	5.19		19,000	5.26
$ 5.41 - $7.08	235,500	9.3	6.40		—	—
Total stock options	1,495,856	8.3	$	4.03	338,290	$	3.12

The range of fair value assumptions related to options granted during the years ended March 31, 2013, 2012 and 2011 were as follows:

	2013	2012	2011
Exercise Price:	$5.26 – 7.08	$3.58 – 5.40	$3.04
Volatility:	78.26 – 80.39%	56.18 – 78.61%	80.3%
Risk Free Rate:	0.85 – 0.93%	0.09 – 2.25%	2.35%
Vesting Period:	5 - 7 years	0 - 5 years	1 - 3 years
Forfeiture Rate:	7.66 - 9.00%	0 - 16.88%	10%
Expected Life	6.25 years	0.25 – 8.25 years	6 years
Dividend Rate	0%	0%	0%

As of March 31, 2013, total unrecognized stock-based compensation expense related to all unvested stock options was $2,536,000, which is expected to be expensed over a weighted average period of 4.1 years.