NOTE 6 INCENTIVE PLANS

Employee Profit Sharing

During 1993, we adopted an employee profit sharing plan (the "Plan"). The purpose of the Plan is to provide a bonus for increased output, improved quality and productivity and reduced costs. We have authorized 50,000 common shares to be available under this Plan. In accordance with the terms of the Plan, employees could acquire newly issued shares of common stock for 90% of the current market value. During 2012 and 2011 no common shares were issued in connection with this plan. Through December 31, 2012, 22,118 common shares had been issued under this Plan.

Stock Options

During 2003, our shareholders approved the adoption of the Nortech Systems Incorporated 2003 Stock Option Plan (the "2003 Plan"). On May 3, 2005, the shareholders approved the 2005 Incentive Compensation Plan (the "2005 Plan") and eliminated the remaining 172,500 option shares available for grant under the 2003 Plan effective February 23, 2005. The total number of shares of common stock that may be granted under the 2005 Plan is 200,000, of which 34,250 remain available for grant at December 31, 2012. The 2005 Plan provides that option shares granted come from our authorized but unissued common stock. The price of the option shares granted under the plan will not be less than 100% of the fair market value of the common shares on the date of grant. Options are generally exercisable after one or more years and expire no later than 10 years from the date of grant.

During 2007, the Board of Directors approved the adoption of the FOCUS Incentive Plan (the "2007 Plan"). The purpose of the 2007 Plan was to provide incentives to our employees to increase our return on sales "ROS" performance measurement. The FOCUS plan was unique from the preceding Plans in that vesting of options was conditional upon our achievement of established performance measurements which were not met and therefore, no options granted from the 2007 Plan could ever vest. In January 2012, the Board of Directors terminated the 2007 FOCUS Incentive Plan and as a result all 319,600 outstanding options under this plan were cancelled.

We estimate the fair value of share-based awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense in the consolidated statements of income over the requisite service periods. Because share-based compensation expense is based on awards that are ultimately expected to vest, share-based compensation expense will be reduced to account for estimated forfeitures. We estimate forfeitures at the time of grant and revise the estimate, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

We used the Black-Scholes option-pricing model to calculate the fair value of option-based awards. Our determination of fair value of option-based awards on the date of grant using the Black-Scholes model is affected by our stock price as well as assumptions regarding a number of subjective variables as noted in the following table. These variables include, but are not limited to, our expected stock price volatility over the term of the awards, risk-free interest rate, and the expected life of the options. The risk-free interest rate is based on a treasury instrument whose term is consistent with the expected life of our stock options. The expected volatility and holding period are based on our historical experience. For all grants, the amount of compensation expense recognized has been adjusted for an estimated forfeiture rate, which is based on historical data. There were no grants during the years ended December 31, 2012 and 2011.

Stock Options with Time-Based Vesting

Total compensation expense related to stock options with time-based vesting for the years ended December 31, 2012 and 2011 was $0 and $27,044, respectively. As of December 31, 2012 there was no unrecognized compensation expense as all time-based options have vested.

A summary of option activity under all plans as of December 31, 2012, and changes during the year then ended is presented below.

			Weighted- Average Exercise Price Per Share			Aggregate Intrinsic Value

Outstanding—January 1, 2012	623,600		$	7.21
Cancelled	(319,600	)		7.43
Forfeited	(15,250	)		7.64

Outstanding—December 31, 2012	288,750		$	7.19	2.50	$	—

Exercisable on December 31, 2012	288,750		$	7.19	2.50	$	—

There were no grants during the years ended December 31, 2012 and 2011. The weighted average fair value of options vested during the years ended December 31, 2012 and 2011 were $0 and $2.64, respectively. There were no options exercised for the years ended December 31, 2012 and 2011.

Equity Appreciation Rights Plan

In November 2010, the Board of Directors approved the adoption of the Nortech Systems Incorporated Equity Appreciation Rights Plan (the "2010 Plan"). The total number of Equity Appreciation Right Units (Units) the Plan can issue shall not exceed an aggregate of 750,000 Units, of which 100,000 Units were issued during the year ended December 31, 2010. On March 7, 2012, we granted an additional 250,000 Units with redemption dates ranging from December 31, 2014 through December 31, 2016. On February 13, 2013, we granted an additional 350,000 units with redemption dates ranging from December 31, 2015 through December 31, 2019.

The 2010 Plan provides that Units issued shall fully vest three years from the grant date unless terminated earlier. Units give the holder a right to receive a cash payment equal to the appreciation in book value per share of common stock from the base date, as defined, to the redemption date. Unit redemption payments under this plan shall be paid in cash within 90 days after we determine the book value as of the redemption date.

Total compensation expense related to these Units based on the estimated appreciation over their remaining terms was $39,000 and $57,000 for the year ended December 31, 2012 and 2011, respectively. As of December 31, 2012 and 2011, approximately $101,000 and $62,000 have been accrued under this plan, respectively. As of December 31, 2012, approximately $86,000 of this balance is included in Other Accrued Liabilities as it will be paid within 12 months. The remaining $15,000 balance at December 31, 2012 and all of the balance at December 31, 2011 are included in Other Long-Term Liabilities.