(9) Stock Compensation Plans

We implemented a stock option plan in September 1998, which expired in September 2008, and provided for the granting of stock options to officers, key employees and consultants. The objectives of this plan included attracting and retaining the best personnel, providing for additional performance incentives, and promoting our success by providing employees the opportunity to acquire common stock.

In 2002, we implemented the 2002 Stock Option Plan. The purpose of this plan is to advance our interests by providing an additional incentive to attract, retain and motivate highly qualified and competent persons who are key to the Company, including employees, consultants, independent contractors, officers and directors. Our success is largely dependent upon their efforts and judgment; therefore, by authorizing the grant of options to purchase common stock, we encourage stock ownership.

Pursuant to our stock option plans, we have a total 843,500 outstanding options, as follows.

					Weighted Average		Weighted
	Range of		Outstanding at		Contractual		Average		Exercisable at
	Exercise Price		June 30, 2012		Periods in Years		Exercise Price		June 30, 2012
1998 Plan	$	8.67 - $16.59		78,500		1.22	$	12.73		67,100
2002 Plan	$	2.45 - $18.21		765,000		6.23	$	5.36		280,400

FASB issued guidance requires that when valuing an employee stock option under the Black-Scholes option pricing model, the fair value be based on the option's expected term and expected volatility rather than the contractual term. The estimate of the fair value on the grant date should reflect the assumptions marketplace participants now use on the date of the measurement (i.e. grant date). During 2011, management changed the expected term in the Black-Scholes option pricing model from four years to two years for new options granted. Management believes that share price volatility over the last two years is more indicative of future share price volatility. The change has had an immaterial impact on the financial statements.

Activity in our stock option plans for the period from January 1, 2010 to June 30, 2012 is summarized below.

	1998 Plan					2002 Plan
	Number of Shares			Weighted Average Option Exercise Price		Number of Shares			Weighted Average Option Exercise Price
Outstanding at January 1, 2010		124,599		$	15.88		736,951		$	12.03
Granted		-		$	-		109,500		$	3.59
Exercised		-		$	-		-		$	-
Cancelled		(34,849	)	$	23.74		(271,651	)	$	14.78
Outstanding at January 1, 2011		89,750		$	12.83		574,800		$	9.12
Granted		-		$	-		179,000		$	2.45
Exercised		-		$	-		-		$	-
Cancelled		-		$	-		(129,100	)	$	14.29
Outstanding at January 1, 2012		89,750		$	12.83		624,700		$	6.15
Granted		-		$	-		181,500		$	4.40
Exercised		-		$	-		(1,000	)	$	3.30
Cancelled		(11,250	)	$	13.54		(40,200	)	$	13.17
Outstanding at June 30, 2012		78,500		$	12.92		765,000		$	6.15

Options outstanding as of June 30, 2012 are exercisable as follows.

	1998 Plan				2002 Plan
Options Exercisable at:	Number of Shares		Weighted Average Option Exercise Price		Number of Shares		Weighted Average Option Exercise Price

June 30, 2012		67,100	$	12.92		280,400	$	6.15
December 31, 2012		10,700	$	12.92		87,863	$	6.15
December 31, 2013		700	$	12.92		168,388	$	6.15
December 31, 2014		-	$	-		149,049	$	6.15
December 31, 2015		-	$	-		79,300	$	6.15
December 31, 2016		-	$	-		-	$	-
Thereafter		-	$	-		-	$	-
Total options exercisable		78,500				765,000

Prior to January 1, 2006, we accounted for the plans under the recognition and measurement provisions of stock-based compensation using the intrinsic value method prescribed by the APB and related Interpretation, as permitted by FASB issued guidance. Under these provisions, no stock-based employee compensation cost was recognized in the Statement of Operations as all options granted under those plans had an exercise price equal to or less than the market value of the underlying common stock on the date of grant.

Upon the exercise of options, the Company issues authorized shares.

Effective January 1, 2006, the Company adopted the fair value recognition provisions of FASB issued guidance using the modified-prospective-transition method. Under that transition method, compensation costs recognized during 2012 and 2011 include the following.

Compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of FASB issued guidance, and

Compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair-value estimated in accordance with the provisions of FASB issued guidance. Results for prior periods have not been restated, as they are not required to be by the pronouncement.

As a result of adopting FASB issued guidance on January 1, 2006, the Company's income from continuing operations before provision for income tax expense and net income for the three months ended June 30, 2012 are lower by approximately $70,000 and $44,000, respectively, than if it had continued to account for share-based compensation under APB guidance. The Company's income from continuing operations before provision for income taxes and net income for the three months ended June 30, 2011 are lower by approximately $55,000 and $34,000, respectively, than if it had continued to account for share-based compensation under APB guidance.

As a result of adopting FASB issued guidance on January 1, 2006, the Company's income from continuing operations before provision for income tax expense and net income for the six months ended June 30, 2012 are lower by approximately $128,000 and $80,000, respectively, than if it had continued to account for share-based compensation under APB guidance. The Company's income from continuing operations before provision for income taxes and net income for the six months ended June 30, 2011 are lower by approximately $118,000 and $73,000, respectively, than if it had continued to account for share-based compensation under APB guidance.

Basic and diluted earnings per share for the three months ended June 30, 2012 would have been $0.19, if the Company had not adopted FASB issued guidance, compared with reported basic and diluted earnings per share of $0.18. Basic and diluted earnings per share for the three months ended June 30, 2011 would have remained unchanged at ($0.10), if the Company had not adopted FASB-issued guidance, compared with reported basic and diluted earnings per share of ($0.10).

Basic and diluted earnings per share for the six months ended June 30, 2012 would have been $0.32, if the Company had not adopted FASB issued guidance, compared with reported basic and diluted earnings per share of $0.31. Basic and diluted earnings per share for the six months ended June 30, 2011 would have been ($0.34), if the Company had not adopted FASB-issued guidance, compared with reported basic and diluted earnings per share of ($0.35).

Because the change in income taxes receivable includes the effect of excess tax benefits, those excess tax benefits also must be shown as a separate operating cash outflow so that operating cash flows exclude the effect of excess tax benefits. FASB issued guidance requires the cash flows resulting from the tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) to be classified as financing cash flows.

There were 181,500 options granted during the three months ended June 30, 2012, as compared with none during the three months ended June 30, 2011. There were no options granted during the three months ended March 31, 2012 or 2011.

The fair value of options granted is estimated on the date of grant using the following assumptions.

	June 30, 2012	June 30, 2011
Dividend yield	N/A	N/A
Expected volatility	39.79	N/A
Risk-free interest rate	0.28	N/A
Expected life (in years)	4.45	N/A