3. Stock-based Compensation Plans

Stock Option Plans

We used the Black-Scholes model to value stock options granted. Expected volatility is based on historical volatility of the Company’s stock. The expected life of options granted represents the period of time that options granted are expected to be outstanding. The risk-free rate for periods within the contractual term of the options is based on the United States Treasury yields in effect at the time of grant.

As recognizing stock-based compensation expense is based on awards ultimately expected to vest, the amount of recognized expense has been reduced for estimated forfeitures based on the Company’s historical experience. Total stock compensation expense recognized by the Company was approximately $48,000 and $27,000 during the three month periods ended January 31, 2013 and 2012, respectively, and $85,000 and $43,000 for the six month periods ended January 31, 2013 and 2012, respectively. There was approximately $232,000 and $164,000 of total unrecognized compensation costs related to non-vested options granted under the Company’s stock option plans as of January 31, 2013 and July 31, 2012, respectively. There were no capitalized stock-based compensation costs at January 31, 2013 or July 31, 2012.

The fair value of each option granted was estimated in the period of issuance using the assumptions in the following table for the three and six month periods ended January 31, 2013 and 2012, respectively:


	Three months ended January 31						Six months ended January 31
	2013			2012			2013			2012
Expected life (years)		10 years			10 years			10 years			10 years
Risk-free interest rate		1.7	%		2.0	%		1.7	%		2.1	%
Expected volatility		130.6	%		125.5	%		130.5	%		123.9	%
Expected forfeiture rate		11.7	%		24.8	%		13.5	%		21.2	%
Expected dividend yield		-	%		-	%		-	%		-	%
Weighted-average estimated
fair value of options granted
during the year	$	1.29		$	1.04		$	1.25		$	0.96

2000 Stock Option Plan

The Company’s 2000 Stock Option Plan (the “2000 Plan”) had 1,950,000 shares of common stock authorized for issuance. Each incentive stock option that was granted under the 2000 Plan is exercisable for a period of not more than ten years from the date of grant (five years in the case of a participant who is a 10% shareholder of the Company, unless the stock options are nonqualified), or such shorter period as determined by the Compensation Committee, and shall lapse upon the expiration of said period, or earlier upon termination of the participant’s employment with the Company. The 2000 Plan expired on December 13, 2010, at which time it was terminated except for outstanding options. As a result, no new options may be granted under the 2000 Plan. Changes in option shares under the 2000 Plan during the three and six months ended January 31, 2013 and 2012 are as follows:


	Number of Options	Wtd. Avg. Exercise Price		Wtd. Avg. Remaining Contractual Period (Years)	Aggregate Instrinsic Value
Outstanding at 10/31/11	1,173,594	$	1.37	5.82	$	90,116
Granted	-		n/a	n/a		n/a
Exercised	(7,750)		0.65	n/a		n/a
Forfeited	(8,575)		0.85	n/a		n/a
Outstanding at 1/31/12	1,157,269	$	1.38	5.59	$	298,444
Exercisable at 1/31/12	981,552	$	1.50	5.10	$	167,097

Outstanding at 10/31/12	1,002,461	$	1.40	4.97	$	114,006
Granted	-		n/a	n/a		n/a
Exercised	(2,000)		0.35	n/a		n/a
Forfeited	(2,500)		0.73	n/a		n/a
Outstanding at 1/31/13	997,961	$	1.41	4.72	$	459,617
Exercisable at 1/31/13	922,374	$	1.47	4.72	$	375,251

	Number of Options	Wtd. Avg. Exercise Price		Wtd. Avg. Remaining Contractual Period (Years)	Aggregate Instrinsic Value
Outstanding at 7/31/11	1,236,333	$	1.36	6.10	$	34,041
Granted	-		n/a	n/a		n/a
Exercised	(20,950)		0.63	n/a		n/a
Forfeited	(58,114)		1.19	n/a		n/a
Outstanding at 1/31/12	1,157,269	$	1.38	5.59	$	298,444
Exercisable at 1/31/12	981,552	$	1.50	5.10	$	167,097

Outstanding at 7/31/12	1,099,769	$	1.41	5.06	$	105,849
Granted	-		n/a	n/a		n/a
Exercised	(12,800)		0.54	n/a		n/a
Forfeited	(89,008)		1.56	n/a		n/a
Outstanding at 1/31/13	997,961	$	1.41	4.72	$	459,617
Exercisable at 1/31/13	922,374	$	1.47	4.72	$	375,251

The range of exercise prices for options outstanding under the 2000 Plan was $0.15 to $2.74 at January 31, 2013 and 2012.

Changes in the 2000 Plan's non-vested option shares included in the outstanding shares above during the three and six months ended January 31, 2013 and 2012 are as follows:


	Number of Options	Wtd. Avg. Exercise Price
Non-vested at 10/31/11	179,467	$	0.75
Granted	-		n/a
Vested	(250)		0.86
Forfeited	(3,500)		0.80
Non-vested at 1/31/12	175,717	$	0.75

Non-vested at 10/31/12	75,587	$	0.68
Granted	-		n/a
Vested	-		n/a
Forfeited	-		n/a
Non-vested at 1/31/13	75,587	$	0.68

	Number of Options	Wtd. Avg. Exercise Price
Non-vested at 7/31/11	181,092	$	0.75
Granted	-		n/a
Vested	(250)		0.86
Forfeited	(5,125)		0.80
Non-vested at 1/31/12	175,717	$	0.75

Non-vested at 7/31/12	78,087	$	0.69
Granted	-		n/a
Vested	-		n/a
Forfeited	(2,500)		0.73
Non-vested at 1/31/13	75,587	$	0.68

The weighted average remaining vesting period was .87 and 1.24 years at January 31, 2013 and 2012, respectively.

2010 Equity Incentive Plan

The Board of Directors adopted the ARI Network Services, Inc. 2010 Equity Incentive Plan (the “2010 Plan”) on November 9, 2010, and the plan was approved by the Company's shareholders in December 2010. The 2010 Plan is the successor to the Company’s 2000 Plan.

The 2010 Plan includes the following provisions:

·	the aggregate number of shares of Common Stock subject to the 2010 Plan is 650,000 shares;

·	the exercise price for options and stock appreciation rights cannot be less than 100% of the fair market value, as defined, of the Company’s Common Stock on the date of grant;

·	the exercise prices for options and stock appreciation rights cannot be repriced without shareholder approval, except to reflect changes to the capital structure of the Company as described in the 2010 Plan;

·	a maximum term of ten (10) years for options and stock appreciation rights;

a maximum of 325,000 of the shares available for issuance under the 2010 Plan can be in the form of restricted shares or restricted stock units, and the 2010 Plan does not have liberal share counting provisions (such as provisions that would permit shares withheld for payment of taxes or the exercise price of stock options to be re-granted under the plan); and

·	awards cannot be transferred to third parties, with the exception of certain estate planning transfers, which can be made if the committee that administers the 2010 Plan approves such transfers.

Changes in option shares under the 2010 Plan during the three and six months ended January 31, 2013 and 2012 are as follows:


	Number of Options	Wtd. Avg. Exercise Price		Wtd. Avg. Remaining Contractual Period (Years)	Aggregate Instrinsic Value
Outstanding at 10/31/11	117,875	$	0.75	9.67	$	23,096
Granted	146,667		1.08	n/a		n/a
Exercised	-		n/a	n/a		n/a
Forfeited	(4,625)		0.61	n/a		n/a
Outstanding at 1/31/12	259,917	$	0.94	9.65	$	145,492
Exercisable at 1/31/12	21,188	$	0.66	9.11	$	17,838

Outstanding at 10/31/12	324,167	$	1.10	9.09	$	57,070
Granted	125,668		1.34	n/a		n/a
Exercised	-		n/a	n/a		n/a
Forfeited	(500)		0.65	n/a		n/a
Outstanding at 1/31/13	449,335	$	1.17	9.11	$	284,393
Exercisable at 1/31/13	111,460	$	1.09	9.11	$	79,585

	Number of Options	Wtd. Avg. Exercise Price		Wtd. Avg. Remaining Contractual Period (Years)	Aggregate Instrinsic Value
Outstanding at 7/31/11	54,250	$	0.67	9.64	$	5,570
Granted	210,667		1.00	n/a		n/a
Exercised	-		n/a	n/a		n/a
Forfeited	(5,000)		0.61	n/a		n/a
Outstanding at 1/31/12	259,917	$	0.94	9.65	$	145,492
Exercisable at 1/31/12	21,188	$	0.66	9.11	$	17,838

Outstanding at 7/31/12	310,667	$	1.10	9.28	$	41,962
Granted	145,668		1.29	n/a		n/a
Exercised	(3,000)		0.66	n/a		n/a
Forfeited	(4,000)		0.66	n/a		n/a
Outstanding at 1/31/13	449,335	$	1.17	9.11	$	284,393
Exercisable at 1/31/13	111,460	$	1.09	9.11	$	79,585

The range of exercise prices for options outstanding under the 2010 Plan was $.575 to $1.70 and $0.575 to $0.922 at January 31, 2013 and 2012, respectively.

Changes in the 2010 Plan's non-vested option shares included in the outstanding shares above during the three and six months ended January 31, 2013 and 2012 are as follows:


	Number of Options	Wtd. Avg. Exercise Price
Non-vested at 10/31/11	96,562	$	0.78
Granted	146,667		1.08
Vested	-		-
Forfeited	(4,500)		0.61
Non-vested at 1/31/12	238,729	$	0.97

Non-vested at 10/31/12	212,457	$	1.11
Granted	125,668		1.34
Vested	-		n/a
Forfeited	(250)		0.65
Non-vested at 1/31/13	337,875	$	1.19

	Number of Options	Wtd. Avg. Exercise Price
Non-vested at 7/31/11	32,937	$	0.67
Granted	210,667		1.00
Vested	-		-
Forfeited	(4,875)		0.61
Non-vested at 1/31/12	238,729	$	0.97

Non-vested at 7/31/12	192,707	$	1.12
Granted	145,668		1.29
Vested	-		n/a
Forfeited	(500)		0.65
Non-vested at 1/31/13	337,875	$	1.19

The weighted average remaining vesting period was 1.61 and 1.92 years at January 31, 2013 and 2012, respectively.

Restricted Stock

During the three months ended January 31, 2013, the Company granted an aggregate of 161,084 shares of restricted stock to certain executive officers, directors and employees under the 2010 plan, 72,000 shares of which will vest one year from the date of grant, and the balance of which vested on the date of grant, subject to 30-day restrictions on transfer. During the three months ended January 31, 2013, 18,000 shares of restricted stock with a grant date fair value of $22,000 were issued under the 2010 Plan as a discretionary bonus to an executive of the Company. The Company used the Black-Scholes model to value the grant with the following assumptions: risk-free interest rate of 1.75%; expected volatility of 1.3010%, expected forfeiture rate of 21.98% and expected dividend yield of 0%. The shares vest as follows: 4,500 shares vested immediately; 4,500 shares vest on July 31, 2013; 4,500 shares vest on July 31, 2014; and 4,500 shares vest on July 31, 2015. No restricted shares were issued during the three and six month periods ended January 31, 2012.

Employee Stock Purchase Plan

The Company’s 2000 Employee Stock Purchase Plan, as amended, (“ESPP”) has 225,000 shares of common stock reserved for issuance, of which 200,311 and 185,156 of the shares have been issued as of January 31, 2013 and July 31, 2012, respectively. All employees with at least nine months of service are eligible to participate. Shares may be purchased at the end of a specified period at the lower of 85% of the market value at the beginning or end of the specified period through accumulation of payroll deductions, not to exceed 5,000 shares per employee per year.