3. Shareholders’ Equity

Stock Option Plan. We adopted our 2007 Stock Option Plan (the “Plan,” as summarized below) to promote our and our shareholders’ interests by helping us to attract, retain and motivate our key employees and associates. Under the terms of the Plan, the Board of Directors may grant either “nonqualified” or “incentive” stock options, as defined by the Internal Revenue Code and related regulations. The purchase price of the shares subject to a stock option will be the fair market value of our common stock on the date the stock option is granted. Generally, vesting of stock options occurs such that 20% becomes exercisable on each anniversary of the date of grant for each of the five years following the grant date of such option. Generally, all stock options must be exercised within five years from the date granted. The number of common shares reserved for issuance under the Plan is 950,000 shares of common stock, subject to adjustment for dividend, stock split or other relevant changes in our capitalization.

Under ASC 718, the value of each employee stock option was estimated on the date of grant using the Black-Scholes model for the purpose of financial information in accordance with ASC 718. The use of a Black-Scholes model requires the use of actual employee exercise behavior data and the use of a number of assumptions including expected volatility, risk-free interest rate and expected dividends. Employee stock options for 87,000 and 235,000 shares of stock were granted during fiscal years 2013 and 2012, respectively.

As of March 31, 2013, $293,000 of total unrecognized compensation costs related to nonvested stock is expected to be recognized over a period of five years. The assumptions for employee stock options are summarized as follows:

Years Ended	March 31, 2013	March 31, 2012
Risk-free interest rate	0.7% to 1.0%	0.9% to 1.3%
Expected life (in years)	5.0	5.0
Expected volatility	99% to 103%	98% to 99%
Expected dividend	0%	0%

Cumulative compensation cost recognized in net income or loss with respect to options that are forfeited prior to vesting is adjusted as a reduction of compensation expense in the period of forfeiture. The volatility of the stock is based on the historical volatility for the period that approximates the expected lives of the options being valued. Fair value computations are highly sensitive to the volatility factor; the greater the volatility, the higher the computed fair value of options granted.

The total fair value of options granted was computed to be approximately $88,000 and $183,000, for the fiscal years ended March 31, 2013 and 2012, respectively. For disclosure purposes, these amounts are amortized ratably over the vesting periods of the options. Effects of stock-based compensation, net of the effect of forfeitures, totaled $60,353 and $67,808 for fiscal years 2013 and 2012, respectively.

The Black-Scholes model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the use of assumptions, including the expected stock price volatility. Because our employee stock options have characteristics significantly different than those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of our employee stock options. A summary of our stock option activity and related information for equity compensation plans approved by security holders for each of the fiscal years ended March 31, 2013 and 2012 is as follows:

	STOCK OPTIONS OUTSTANDING
	Number Outstanding		Weighted-Average Exercise Price per Share
BALANCE AT MARCH 31, 2011	585,000		$	1.62
Granted	155,000		1.05
Forfeited/expired	(105,000	)	2.38
BALANCE AT MARCH 31, 2012	635,000		$	1.35
Granted	62,000		1.34
Forfeited/expired	(260,000	)	1.55
BALANCE AT MARCH 31, 2013	437,000		$	1.24

A summary of our stock option activity and related information for equity compensation plans not approved by security holders for the fiscal year ended March 31, 2013 is as follows:

	STOCK OPTIONS OUTSTANDING
	Number Outstanding		Weighted-Average Exercise Price per Share
BALANCE AT MARCH 31, 2011	—		$	—
Granted	80,000		1.08
BALANCE AT MARCH 31, 2012	80,000		$	1.08
Granted	35,000		1.37
Forfeited/expired	(5,000	)	1.05
BALANCE AT MARCH 31, 2013	110,000		$	1.15

The following table summarizes information about employee stock options outstanding and exercisable at March 31, 2013:

	STOCK OPTIONS OUTSTANDING				STOCK OPTIONS EXERCISABLE
Range of Exercise Prices	Number Outstanding	Weighted-Average Remaining Contractual Life (in Years)	Weighted-Average Exercise Price per Share		Number Exercisable	Weighted-Average Exercise Price per Share
$0.60 - $1.09	292,000	3.5	$	1.01	70,602	$	1.02
$1.15 - $1.34	130,000	1.8	$	1.22	76,090	$	1.20
$1.45 - $2.15	125,000	2.1	$	1.71	75,922	$	1.79
	547,000	2.8	$	1.22	222,614	$	1.34

Of the 547,000 options outstanding as of March 31, 2013, 407,000 are nonqualified stock options and 140,000 are incentive stock options. The exercise price of all options granted through March 31, 2013 has been equal to or greater than the fair market value, as determined by our Board of Directors or based upon publicly quoted market values of our common stock on the date of the grant. As of March 31, 2013, 188,000 options for our common stock remain available for grant under the Plan.