Stock Appreciation Rights

The board of directors of Torotel approved the Directors Stock Appreciation Rights Plan (the “Plan”) for non-employee directors in September 2004. Each stock appreciation right (“SAR”) is equal to one share of common stock of Torotel, and the aggregate number of SARs that may be granted under the Plan shall not exceed 500,000. The effective date of the Plan is October 1, 2004, and the Plan has a term of 10 years.

Pursuant to the Plan, 20,000 SARs were granted on the effective date to each of the three current non-employee directors serving at that time. The initial price at which each SAR was granted was $.35, which equaled the market price of Torotel’s common stock on the date of grant. Accordingly, no compensation cost was recognized at the time of grant.

SARs shall automatically be granted in the future as follows: (1) each person who is elected as a director, who was not a director on the effective date of the Plan, shall be granted 10,000 SARs on the date such person is elected a director; and (2) on each May 1 following the effective date during the term of the Plan, each person serving as a director on such date shall be granted 10,000 SARs. After the initial grant the price at which each SAR is granted shall be the average of the closing price of Torotel’s common stock for the 10 consecutive days immediately preceding the date of grant. Upon exercise of a SAR, Torotel will pay the grantee an amount (the “Spread”) equal to the excess of the Exercise Price over the SAR grant price multiplied by the number of shares being exercised. The Exercise Price shall be the average of the closing price of Torotel’s common stock for the 10 consecutive days immediately preceding the notice of exercise. For any payments that exceed $10,000, Torotel has the option to make quarterly payments over 3 years with interest payable quarterly at the prime rate of Torotel’s primary bank.

Each SAR granted under the Plan may be exercised to the extent that the grantee is vested in such SAR. The SARs will vest according to the following schedule:



Number of Years the Grantee has remained	Shares represented
a Torotel director following	by a SAR in which
the Date of Grant	a Grantee is Vested
Under one	—	%
At least one but less than two	33	%
At least two but less than three	67	%
Three or more	100	%

A grantee shall become fully vested in all of his or her SARs under the following circumstances: (i) upon termination of the grantee’s service as a director of Torotel for reasons of death, disability or retirement; (ii) if the Compensation and Nominating Committee (the “Committee”), in its sole discretion, determines that acceleration of the SAR vesting schedule would be desirable for Torotel; or (iii) if Torotel shall, pursuant to action by its Board of Directors, at any time propose to merge into, consolidate with, or sell or otherwise transfer all or substantially all of its assets to another corporation, and provision is not made pursuant to the terms of such transaction for the assumption by the surviving, resulting or acquiring corporation of outstanding SARs or for substitution of new SARs therefor, the Committee shall cause written notice of the proposed transaction to be given to each grantee not less than 20 days prior to the anticipated effective date of the proposed transaction, and his or her SARs shall become fully vested and, prior to a date specified in such notice, which shall be not more than 10 days prior to the anticipated effective date of the proposed transaction, each grantee shall have the right to exercise all of his or her SARs.

Compensation expense is recognized over the vesting period based upon the estimated fair value of the SARs pursuant to the terms of the Plan using the Black-Scholes options-pricing model as of the end of each financial reporting period. As of July 31, 2011, the fair value of the SARs was determined using the following assumptions: no dividend payments over the life of the SARs since Torotel has not issued any form of dividend since 1985; an expected volatility of 134.74% based on Torotel’s historical volatility using the weekly closing price over the past three years; a ten day average market price of $0.430; a risk-free interest rate of 1.54%; and an expected life of three years based on the length of service estimated to be served. As of July 31, 2010, the fair value of the SARs was determined using the following assumptions: no dividend payments over the life of the SARs since Torotel has not issued any form of dividend since 1985; an expected volatility of 103.11% based on Torotel’s historical volatility using the weekly closing price over the past three years; a ten day average market price of $0.280; a risk-free interest rate of 1.80%; and an expected life of three years based on the length of service estimated to be served. Based on these assumptions, the fair value prices per share of the outstanding SARs as of July 31, 2011, are summarized as follows:



	SARs Under	Exercise		Fair Value		%		Aggregate Vested		Aggregate Intrinsic
Grant Date	Option	Price		Price		Vested		Fair Value		Value
October 1, 2004	60,000	$	0.350	$	0.336	100	%	$	20,000	$	13,000
May 1, 2005	30,000	$	0.302	$	0.343	100	%	$	10,000	$	8,000
May 1, 2006	30,000	$	0.695	$	0.298	100	%	$	9,000	$	—
May 1, 2007	30,000	$	0.500	$	0.318	100	%	$	10,000	$	2,000
May 1, 2008	30,000	$	0.550	$	0.313	100	%	$	10,000	$	—
May 1, 2009	30,000	$	0.208	$	0.358	67	%	$	7,000	$	11,000
May 1, 2010	30,000	$	0.300	$	0.343	33	%	$	3,000	$	8,000
May 1, 2011	30,000	$	0.560	$	0.312	—		$	—	$	—
June 3, 2011	10,000	$	0.550	$	0.313	—		$	—	$	—

The vested portion represents 210,000 SARs. As of July 31, 2011, the total aggregate intrinsic value of these exercisable SARs was $42,000.

SARs transactions for the three month periods ended July 31, 2011 and 2010 are summarized as follows:



	2011			2010
	SARs Under Option	Weighted Average Grant Price		SARs Under Option	Weighted Average Grant Price
Outstanding at May 1	240,000	$	0.407	240,000	$	0.418
Granted	40,000	$	0.558	40,000	$	0.300
Exercised	—	$	—	—	$	—
Forfeited	—	$	—	—	$	—
Outstanding at July 31	280,000	$	0.428	280,000	$	0.401

SARs exercisable at end of period	210,000	$	0.426	200,000	$	0.438
Weighted average fair value of SARs granted during the period		$	0.313		$	0.191

The following information applies to SARs outstanding for each of the three month periods ended July 31, 2011 and 2010:



	2011		2010
Number outstanding	280,000		280,000
Range of grant prices	$0.208 - $0.695		$0.208 - $0.695
Weighted average grant price	$	0.428	$	0.401
Weighted average remaining contractual life	6.04 yrs.		6.74 yrs.

Total compensation expense for the outstanding SARs for the three months ended July 31, 2011 and 2010 was a benefit of $11,000 and an expense of $7,000, respectively. As of July 31, 2011, there was $23,000 of total unrecognized compensation expense related to non-vested SARs granted under the Plan. That cost is expected to be recognized over a weighted average period of 2.23 years. The liability for SARs on the consolidated condensed balance sheets as of July 31, 2011 and April 30, 2011 was $69,000 and $80,000, respectively.