11. Share-Based Compensation

We have Stock Incentive Plans providing for the grant of incentive stock options to employees and non-qualified stock options to employees and directors. The Compensation Committee of the Board of Directors ("Compensation Committee") administers the Stock Incentive Plans. Under the plans, the Compensation Committee may award stock options and shares of Common Stock on a restricted basis. The plans also specifically provide for stock appreciation rights and authorize the Compensation Committee to provide, either at the time of the grant of an option or otherwise, that the option may be cashed out upon terms and conditions to be determined by the Compensation Committee or the Board of Directors.

Option awards are granted with an exercise price equal to the market price of our stock at the date of grant. We recognize stock compensation expense in accordance with ASC 718-10 over the requisite service period of the individual grantees, which generally equals the vesting period. All of our stock compensation is accounted for as equity instruments.

Our 2011 Stock Incentive Plan became effective November 1, 2011 and replaced the 2001 Stock Option Plan that expired on October 31, 2011. As of November 1, 2011 there were no shares of Common Stock available for future grant under the 2001 Stock Option Plan. The 2011 Stock Incentive Plan terminates on October 31, 2021. Stockholders have authorized the issuance of up to 500,000 shares under this plan, and at June 30, 2013, there were 222,685 shares available for future grants.

We recorded share-based compensation related to issuance of stock options and restricted stock to employees, board members, and non-employees, as follows (amounts in thousands of dollars):


		Year Ended June 30,
		2013		2012		2011
Share-based compensation expense included in the
Statement of Operations:
Cost of sales	$	56	$	55	$	50
Sales and marketing		165		133		286
Research and development		128		102		171
General and administrative		500		426		719
Total		849		716		1,226
Tax benefit		-		-		-
Share-based compensation expense, net of taxes	$	849	$	716	$	1,226

Based on historical experience of restricted stock and option pre-vesting cancellations, we estimated an annualized forfeiture rate of 10.0% for unvested restricted stock awards and stock options outstanding as of June 30, 2013. We estimated a 9.0% forfeiture rate for restricted stock awards and stock options outstanding as of June 30, 2012. We update our expectation of forfeiture rates quarterly and under the true-up provisions of ASC 718-10, we will record additional expense if the actual forfeiture rate is lower than estimated, and will record a recovery of prior expense if the actual forfeiture is higher than estimated.

We have not received any cash from option exercises under all share-based payment arrangements for the fiscal years ended June 30, 2013, 2012 and 2011.

During fiscal year 2013, we issued 243,000 shares of restricted stock and there are 456,076 total restricted shares outstanding as of June 30, 2013. 109,667 of these restricted shares were issued in fiscal year 2013 to employees and board members that vest over a three year period for board members and a four year service period for employees. Vesting is based solely on a service condition, and restrictions generally release ratably over the service period. A summary of the activity of our service condition restricted shares during our fiscal year 2013 is presented below:


				Weighted-
				Average
				Grant-Date
Restricted Stock Awards	Shares			Fair-Value

Non-vested at July 1, 2012	246,066		$	4.94
Granted	109,667			4.63
Vested	(106,977	)		4.63
Forfeited	(23,692	)		5.15
Non-vested at June 30, 2013	225,064		$	4.91

During fiscal years 2010, 2011 and 2013, we issued performance-based restricted shares ("PSAs") to senior and executive management and board members. The remaining PSAs granted in fiscal year 2010 expired and were cancelled in fiscal year 2013 as all performance criteria were not achieved. The PSA's issued in fiscal year 2011 will be released only if either company performance criteria or market condition criteria are achieved over a three year performance period. The performance criteria are determined each year and require us to achieve certain annual revenue and operating income goals. To the extent that these annual goals are met, a portion of the shares will vest and be released. The market condition requires our stock to reach a certain closing share price at the end of three years. Provided that the market condition is met, any remaining shares that did not vest based on the performance condition will become fully vested at the end of the three years. The 133,333 PSA's issued in fiscal year 2013 will be released only if company performance criteria are achieved over a three year performance period. The performance criteria are determined each year and require us to achieve certain annual revenue and operating income goals.

During our fiscal year 2013 we did not release any PSAs as neither required performance conditions from related to our fiscal year 2012 financial results nor market conditions were met for our fiscal year 2010 and 2011 PSA grants. We cancelled 121,175 PSAs during fiscal year 2013 for restricted shares granted to executive management and board members that were either forfeited or expired during the period primarily because neither the performance criteria for our fiscal 2010, 2011 and 2012 financial results, nor the market condition (achievement of certain share price) were met. The weighted average grant-date fair-value for our performance shares with both performance and market conditions was based upon a Geometric Brownian Motion model and Monte Carlo simulation. A summary of the activity of our PSAs during fiscal year 2013, is presented below:


				Weighted-
				Average
				Grant-Date
Performance Stock Awards	Shares			Fair-Value

Non-vested at July 1, 2012	218,854		$	2.25
Granted	133,333			4.40
Vested	-			-
Forfeited	(121,175	)		1.93
Non-vested at June 30, 2013	231,012		$	3.66

Total compensation cost of restricted stock awards issued, but not yet vested as of June 30, 2013 is $775,000, which is expected to be recognized over the weighted average period of 1.60 years.

We use the Black-Scholes valuation model to estimate the fair value of each option award on: 1) the date of grant for grants to employees, and 2) each reporting period-end date for grants to non-employees, until the non-employee shares have vested, at which point the vest date becomes the final measurement date for non-employee grants. We did not grant any stock options in fiscal years 2013, 2012 and 2011, and there were no unvested options granted to non-employees as of June 30, 2013. During the third quarter of our fiscal year 2013 our Board of Directors approved a $0.50 reduction in the exercise price of outstanding stock options for existing employees and board members as an equitable adjustment for the $0.50 special dividend declared and paid during the second quarter of our fiscal year 2013. We accounted for this equitable adjustment to exercise price as a modification on the date of approval. This modification resulted in less than $1,000 of additional expense as most option exercise prices remain above our stock's trading price after the equitable adjustment. We use the Black-Scholes valuation model to estimate the fair value of each option award under modification accounting.

A summary of option activity under the plans as of June 30, 2013, and changes during the year is presented below:


					Weighted-
				Weighted-	Average
				Average	Remaining		Aggregate
				Exercise	Contractual		Intrinsic
Options	Shares			Price	Term (Years)		Value

Outstanding as of July 1, 2012	255,766		$	14.65
Granted	-		$	-
Exercised	-		$	-
Forfeited or expired	(54,684	)	$	17.78
Outstanding as of June 30, 2013	201,082		$	13.27	3.82	$	86,000
Vested or expected to vest at June 30, 2013	201,082		$	13.27	3.82	$	86,000
Exercisable at June 30, 2013	201,082		$	13.27	3.82	$	86,000

The following table summarizes information about stock options outstanding and exercisable at June 30, 2013:


	Outstanding Options				Options Exercisable
	Weighted
	Average			Weighted			Weighted
Range of	Remaining			Average			Average
Exercise	Contractual	June 30,		Exercise	June 30,		Exercise
Prices	Life (Years)	2013		Price	2013		Price
$5.90	5.09	20,000	$	5.90	20,000	$	5.90
$6.80	4.82	60,000	$	6.80	60,000	$	6.80
$11.10 - $13.50	3.85	75,162	$	13.13	75,162	$	13.13
$14.70 - $45.10	2.04	42,076	$	22.99	42,076	$	22.99
$48.90	0.60	3,844	$	48.90	3,844	$	48.90
$5.90 - $48.90	3.82	201,082	$	13.27	201,082	$	13.27

The total intrinsic value of options both outstanding and exercisable was $86,000, $0 and $0 for each of the fiscal years ended June 30, 2013, 2012 and 2011, respectively. There is no remaining compensation cost for options granted as all outstanding options have vested as of June 30, 2013. We generally issue new shares to satisfy option exercises.