10.

Stock-Based Compensation

The Company's Equity Incentive Plans, adopted in fiscal years 1997, 1999 and 2001, authorize the granting of incentive stock options, supplemental stock options, stock bonuses, and restricted stock purchase agreements to officers, directors, and employees of the Company and to non-employee consultants. Incentive stock options are granted only to employees and are issued at prices not less than the fair market value of the stock at the date of grant. The options generally vest over a four-year period and the term of any option cannot be greater than ten years from the date of grant. Stock bonuses and restricted stock purchase agreements are issued at prices not less than 85% of the fair market value of the stock at the date of grant.

Equity Incentive Plans

No grants were made under the 1997 Equity Incentive Plan during fiscal years 2013 and 2012. The Board of Directors has declared that no future grants will be made under this plan.

During fiscal year 1999, the Board of Directors authorized up to an aggregate of 400,000 shares of the Company's common stock for issuance under the 1999 Equity Incentive Plan. No grants were made under the 1999 Equity Incentive Plan during fiscal years 2013 and 2012.

During fiscal year 2001, the Board of Directors authorized up to an aggregate of 100,000 shares of the Company’s common stock for issuance under the 2001 Equity Incentive Plan. Grants to officers or directors are prohibited under the terms of this plan. No options were issued under this plan during fiscal years 2013 and 2012.

Employee Stock Purchase Plan

During 1999, the board of directors adopted an Employee Stock Purchase Plan, which permits employees to purchase up to 50,000 shares of the Company's common stock. The plan was amended in 2005 to increase the number of shares available under the plan to 200,000. The purchase price under this plan is 85% of the fair market value of the common stock at the beginning of an offering period or on a purchase date, whichever is less. Offering periods generally last one year with purchase dates six and twelve months from the beginning of an offering period. During fiscal years 2013 and 2012, employees purchased -0- and 12,773 shares of common stock, respectively, under this plan.

Stock Compensation

Stock-based compensation is calculated on the date of grant using the fair value of the option as determined using the Black-Scholes option pricing model. The compensation cost is then amortized on a straight-line basis over the vesting period. The Black-Scholes valuation calculation requires the Company to estimate key assumptions such as expected term, volatility and forfeiture rates to determine the stock options fair value. The estimate of these key assumptions is based on historical information and judgment regarding market factors and trends.

Expected volatilities are based on historical daily closing prices adjusted for expected future volatility. The Company believes that implied volatility is more reflective of market conditions and a better indicator of expected volatility than historical volatility. The Company uses historical information to calculate expected life of option grants. The Company believes that historical information is currently reflective of the economic life of outstanding option grants. The dividend yield is determined by dividing the expected per share dividend during the coming year by the average fair market value of the stock during the quarter. The Company has not historically declared any cash dividends on its common stock, and currently intends to retain any retained earnings to finance the operation and expansion of the business and therefore does not expect to pay cash dividends on the common stock in the foreseeable future. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant.

Total stock-based compensation recognized for the year ended July 31, 2013 and 2012, related to stock options vested, stock grants and ESPP shares issued during the year totaled $4,000 and $7,000, respectively.

As of July 31, 2013, the Company has no unrecognized compensation costs related to unvested stock options outstanding under the Plans.

Activity in the Company’s stock option plans during fiscal years 2013 and 2012 is as follows:

	2013
					Weighted
	Shares				Average
	Available		Shares		Exercise
	for Grant		Outstanding		Price
Beginning of year		307,344		68,933	$	11.19
Granted		-		-		-
Exercised		-		-		-
Cancelled		8,600		(8,600)		7.07
End of year		315,944		60,333	$	11.78

	2012
					Weighted
	Shares				Average
	Available		Shares		Exercise
	for Grant		Outstanding		Price
Beginning of year		302,756		73,521	$	10.80
Granted		-		-		-
Exercised		-		-		-
Cancelled		4,588		(4,588)		5.03
End of year		307,344		68,933	$	11.19

Information regarding the stock options outstanding under the Company’s stock option plans at July 31, 2013 is summarized as follows:

			Weighted
			Average		Weighted				Weighted
	Outstanding		Remaining		Average		Exercisable		Average
	at July 31,		Contractual		Exercise		at July 31,		Exercise
Range of Exercise Prices	2013		Life		Price		2013		Price
$ 5.01 — $10.00		30,000		2.9 years		7.15		30,000		7.15
$15.01 — $20.00		30,333		0.6 years		16.35		30,333		16.35
		60,333		1.7 years	$	11.78		60,333	$	11.78

The aggregate intrinsic value of both options outstanding and options exercisable as of July 31, 2013 was approximately $0.