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 Directors (the "Board") 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 September 30, 2012, 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 September 30, 2012, must be exercised within either five or ten years from the date of grant.

During the first nine months of 2012, options for 14,000 shares and 125,000 shares were issued under the 2006 Plan at a per-share option exercise price of $11.54 and $10.90, respectively. As of September 30, 2012, 401,000 shares were available for granting future options.

The total grant date fair value of options vested during the first nine months of 2012 was approximately $204,000. Total pre-tax stock-based compensation expense, recognized in Salaries, wages and benefits during the third quarter of 2012 was approximately $49,000. Total pre-tax stock-based compensation expense, recognized in Salaries, wages and benefits during the first nine months of 2012 was approximately $303,000 and includes approximately $199,000 recognized as a result of the increased annual grant of 5,000 shares to each non-employee director during the first nine months of 2012. The recognition of stock-based compensation expense did not have a recognizable impact on diluted or basic earnings per share reported for the third quarter ending September 30, 2012 but did decrease diluted and basic earnings per common share by approximately $0.02 during the nine months ending September 30, 2012. As of September 30, 2012, the Company had stock-based compensation plans with total unvested stock-based compensation expense of approximately $798,000 which is being amortized on a straight-line basis over the remaining vesting period. As a result, the Company expects to recognize approximately $49,000 in additional compensation expense related to unvested option awards during the remainder of 2012 and to recognize approximately $195,000 in additional compensation expense related to unvested option awards during each of the years 2013 through 2014, $189,000 in additional compensation expense related to unvested option awards during 2015, $128,000 in additional compensation expense related to unvested option awards during 2016 and $42,000 in additional compensation expense related to unvested option awards during 2017.

The total grant date fair value of options vested during the first nine months of 2011 was approximately $98,000. Total pre-tax stock-based compensation expense, recognized in Salaries, wages and benefits during the third quarter of 2011 was approximately $12,000. Total pre-tax stock-based compensation expense, recognized in Salaries, wages and benefits during the first nine months of 2011 was approximately $147,000 and included approximately $98,000 recognized as a result of the annual grant of 2,000 shares to each non-employee director made during the first quarter of 2011. The recognition of stock-based compensation expense did not have a recognizable impact on diluted or basic loss per share reported for the third quarter ending September 30, 2011 but did increase diluted and basic loss per common share by approximately $0.01 during the nine months ending September 30, 2011. As of September 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 $264,000 which was being amortized on a straight-line basis over the remaining vesting period. Stock-based compensation expense recognized during the first nine months of 2011 related to the grant of performance-based variable nonqualified stock options was approximately $1,000 and was based on estimated performance criteria for 2011.

The weighted average grant date fair value of options granted during the first nine months of 2012 and 2011 was $5.96 per share and $6.14 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:

	Nine Months Ended
	September 30,
	2012	2011
Dividend yield	0%	0%
Volatility	57.88% - 65.89%	65.81%
Risk-free rate	0.64% - 1.09%	1.79%
Expected life	4.2 years - 6.5 years	4.3 years
Fair value of options	$5.54 - $6.06	$6.14

The Company does not anticipate paying any additional cash dividends in the foreseeable future other than those dividends paid in April 2012. 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 nine months ended September 30, 2012 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		180,942		$	16.50
Granted		139,000			10.96
Exercised		(6,000	)		9.04
Cancelled/forfeited/expired		(78,500	)		22.64
Outstanding at September 30, 2012		235,442		$	11.38		7.2	$	24,500

Exercisable at September 30, 2012		87,889		$	12.02		3.7	$	24,500
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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 September 28, 2012, was $9.97.

The number, weighted average exercise price and weighted average remaining contractual life of options outstanding as of September 30, 2012 and the number and weighted average exercise price of options exercisable as of September 30, 2012 are as follows:

Exercise Price	Shares Under Outstanding Options	Weighted-Average Remaining Contractual Term	Shares Under Exercisable Options
		(in years)
$3.84	4,000	1.4	4,000
$10.90	21,000	4.7	21,000
$10.90	104,000	9.7	-
$11.22	54,442	8.2	10,889
$11.54	12,000	4.4	12,000
$11.75	12,000	3.4	12,000
$14.32	14,000	2.4	14,000
$14.98	14,000	0.4	14,000
	235,442	7.2	87,889

Cash received from option exercises totaled approximately $55,000 and $15,000 during the nine months ended September 30, 2012 and September 30, 2011, respectively. The Company issues new shares upon option exercise.