NOTE D: STOCK BASED COMPENSATION

The Company maintains a stock option plan under which incentive stock options and nonqualified stock options may be granted. On March 2, 2006, the Company's Board of Director's adopted, and shareholders later approved, the 2006 Stock Option Plan (the “2006 Plan”). Under the 2006 Plan 750,000 shares are reserved for the issuance of stock options to directors, officers, key employees, and others. The option exercise price under the 2006 Plan is the fair market value of the stock on the date the option is granted. The fair market value is determined by the average of the highest and lowest sales prices for a share of the Company's common stock, on its primary exchange, on the same date that the option is granted.

Outstanding incentive stock options at June 30, 2011, must be exercised within either five or ten years from the date of grant and vest in increments of 20% each year. Outstanding nonqualified stock options at June 30, 2011, must be exercised within either five or ten years from the date of grant.

During the first six months of 2011, options for 16,000 shares were issued under the 2006 Plan at an option exercise price of $11.75 per share, and at June 30, 2011, 540,000 shares were available for granting future options.

In November 2010, the Company granted to certain key employees, 50,000 nonqualified stock options and 64,000 performance-based variable nonqualified stock options. The exercise price for these awards was fixed at the grant date and was equal to the fair market value of the stock on that date. The nonqualified stock options vest in increments of 20% each year. The performance-based nonqualified stock options may be earned in four quarterly installments and one annual installment with vesting to occur in increments of 20% each year for any options earned. In order to meet the performance criteria, certain quarterly and annual “operating ratio” results must be achieved. The number of performance-based nonqualified options vesting each fiscal year will not be known until the date the quarterly performance criteria is measured. As of June 30, 2011, none of the options for shares have vested under this combined 114,000 share option grant.

The total grant date fair value of options vested during the first six months of 2011 was approximately $98,000. Total pre-tax stock-based compensation expense, recognized in Salaries, wages and benefits during the first six months of 2011 was approximately $135,000 and includes approximately $98,000 recognized as a result of the annual grant of 2,000 shares to each non-employee director during the first quarter of 2011. The recognition of stock-based compensation expense increased diluted and basic loss per common share by approximately $0.01 during the six months ending June 30, 2011 but did not have a recognizable impact on diluted or basic earnings per share reported for the second quarter ending June 30, 2011. As of June 30, 2011, the Company had stock-based compensation plans with total unvested stock-based compensation expense, excluding stock-based compensation related to the performance-based variable nonqualified stock option grant, of approximately $280,000 which is being amortized on a straight-line basis over the remaining vesting period. As a result, the Company expects to recognize approximately $32,000 in additional compensation expense related to unvested option awards during the remainder of 2011 and to recognize approximately $63,000 in additional compensation expense related to unvested option awards during each of the years 2012 through 2014 and $59,000 during 2015. Stock-based compensation expense recognized during the first six months of 2011 related to the grant of performance-based variable nonqualified stock options was approximately $5,000 which was based on estimated performance criteria for 2011.

The total grant date fair value of options vested during the first six months of 2010 was approximately $118,000. Total pre-tax stock-based compensation expense, recognized in Salaries, wages and benefits during the first six months of 2010 was approximately $118,000 which resulted from the annual grant of an option for 2,000 shares to each non-employee director during the first quarter of 2010. The recognition of stock-based compensation expense decreased diluted and basic earnings per common share by approximately $0.01 during the six months ending June 30, 2010 but did not have a recognizable impact on diluted or basic earnings per share reported for the second quarter ending June 30, 2010. As of June 30, 2010, the Company did not have any stock-based compensation plans with unrecognized stock-based compensation expense.

The weighted average grant date fair value of options granted during the first six months of 2011 and 2010 was $6.14 per share and $7.38 per share, respectively.

The fair value of the Company's employee stock options was estimated at the date of grant using a Black-Scholes-Merton (“BSM”) option-pricing model using the following assumptions:

	Six Months Ended
	June 30,
	2011	2010
Dividend yield	0%	0%
Volatility	65.81%	64.31%
Risk-free rate range	1.79%	1.80%
Expected life	4.3 years	4.3 years
Fair value of options	$6.14	$7.38

The Company has never paid any cash dividends on its common stock and we do not anticipate paying any cash dividends in the foreseeable future. The estimated volatility is based on the historical volatility of our stock. The risk free rate for the periods within the expected life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The expected life of the options was calculated based on the historical exercise behavior.

Information related to option activity for the six months ended June 30, 2011 is as follows:

	Shares Under Options	Weighted-Average Exercise Price	Weighted- Average Remaining Contractual Term	Aggregate Intrinsic Value*
		(per share)	(in years)
Outstanding-beginning of year	251,500	$15.86
Granted	16,000	11.75
Exercised	(4,000)	3.84
Cancelled/forfeited/expired	(14,000)	26.73
Outstanding at June 30, 2011	249,500	$15.17	5.4	$42,210

Exercisable at June 30, 2011	135,500	$18.50	2.0	$42,210
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* The intrinsic value of a stock option is the amount by which the market value of the underlying stock exceeds the exercise price of the option. The per share market value of our common stock, as determined by the closing price on June 30, 2011, was $9.87.

The number, weighted average exercise price and weighted average remaining contractual life of options outstanding as of June 30, 2011 and the number and weighted average exercise price of options exercisable as of June 30, 2011 are as follows:

Exercise Price	Shares Under Outstanding Options	Weighted-Average Remaining Contractual Term	Shares Under Exercisable Options
		(in years)
$3.84	7,000	2.7	7,000
$11.22	114,000	9.5	-
$11.75	16,000	4.7	16,000
$14.32	16,000	3.7	16,000
$14.98	16,000	1.7	16,000
$19.88	12,500	1.2	12,500
$22.92	14,000	0.7	14,000
$23.22	54,000	1.2	54,000
	249,500	5.4	135,500

Cash received from option exercises totaled approximately $15,000 and $4,000 during the six months ended June 30, 2011 and June 30, 2010, respectively. The Company issues new shares upon option exercise.