8. SHARE-BASED COMPENSATION

The Company accounts for share-based payment arrangements using fair value. If an award vests or becomes exercisable based on the achievement of a condition other than service, such as for meeting certain performance or market conditions, the award is classified as a liability. Liability-classified awards are remeasured to fair value at each balance sheet date until the award is settled. The Company currently has no liability-classified awards. Equity- classified awards, including grants of employee stock options, are measured at the grant-date fair value of the award and are not subsequently remeasured unless an award is modified. The cost of equity-classified awards is recognized in the statement of operations over the period during which an employee is required to provide the service in exchange for the award, or the vesting period. All of the Company’s stock options are service-based awards, and because the Company’s stock options are “plain vanilla,” as defined by the U.S. Securities and Exchange Commission in Staff Accounting Bulletin No. 107, they are reflected only in Equity and Compensation Expense accounts.

Stock Options

As of September 30, 2013, the Company had the following two shareholder approved 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 September 30, 2013, there were 419,328 options 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 September 30, 2013, there were 115,123 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 September 30, 2013
	Authorized	Available	Outstanding

2005 Plan	2,075,000	419,328	1,463,556
2004 Directors Plan	200,000	115,123	18,000
Total	2,275,000	534,451	1,481,556

All stock option grants made under the 2005 Plan and the 2004 Directors Plan were 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 which ranges from 4 to 7 years. Compensation expense recognized for options issued under the 2005 Plan was $176,000 and $354,000 for the three and six months ended September 30, 2013, respectively. Compensation expense recognized for options issued under the 2005 Plan was $173,000 and $295,000 for the three and six months ended September 30, 2012, respectively. Compensation expense recognized for options issued under the 2004 Directors Plan was $51,000 for the three and six months ended September 30, 2013. Compensation expense recognized for options issued under the 2004 Directors Plan was $77,000 for the three and six months ended September 30, 2012, respectively. All share-based compensation has been classified as General and Administrative expense.

A summary of option activity under the Company’s stock plans for the six months ended September 30, 2013 is presented below:

Option Activity	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding at March 31, 2013	1,495,856		$	4.03	8.3 years	$	1,139,324
Granted	6,000		5.56		—	—
Exercised	(12,450	)	$	2.40	—	42,390
Forfeited or expired	(7,850	)	$	4.48	—	12,765
Outstanding at September 30, 2013	1,481,556		$	4.04	7.8 years	$	2,800,437
Exercisable at September 30, 2013	496,090		$	3.42	7.2 years	$	1,217,213

The aggregate intrinsic value of September 30, 2013 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 $5.84 for such day.

A summary of the Company’s non-vested options for the six months ended September 30, 2013 is presented below:

Nonvested Options	Shares		Weighted Average Grant-Date Fair Value
Nonvested at March 31, 2013	1,157,566		$	3.05
Granted	6,000		.84
Vested	(170,250	)	2.54
Forfeited or expired	(7,850	)	3.10
Nonvested at September 30, 2013	985,466		$	3.12

The following table summarizes the weighted average characteristics of outstanding stock options as of September 30, 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	434,460	7.0	$	2.93	324,220	$	2.82
$ 3.71 - $4.42	731,096	7.9	3.82		111,620	3.82
$ 4.43 - $5.40	77,500	7.9	5.19		19,000	5.26
$ 5.41 - $7.08	238,500	8.8	6.38		41,250	6.25
Total stock options	1,481,556	7.8	$	4.04	496,090	$	3.42

There were 6,000 stock options granted during the three and six months ended September 30, 2013. There were 226,000 stock options granted during the three and six months ended September 30, 2012. The value assumptions related to options granted during the six months ended September 30, 2013 were as follows:

		2013
Exercise Price:		$5.56
Volatility:		38.00%
Risk Free Rate:		0.14%
Vesting Period:		6 months
Forfeiture Rate:		0%
Expected Life		1.00 year
Dividend Rate		0%

As of September 30, 2013, total unrecognized share-based compensation expense related to all unvested stock options was $2,264,000, which is expected to be recognized over a weighted average period of 3.9 years.