9.	Stock-Based Compensation.

In August 2008, our shareholders approved the 2008 Equity Incentive Plan (the “2008 Plan”), which provides for the grant of equity incentives, consisting of options, stock appreciation rights, restricted stock and restricted stock units to officers, other key employees, directors and consultants. The 2008 Plan initially set aside, for the grant of equity incentives, 300,000 shares of the Company’s common stock, plus an additional 41,500 shares which was equal to the total of the shares that were then available for the grant of new options under our existing stockholder approved stock incentive plans (the “Previously Approved Plans”). At the same time, those 41,500 shares ceased to be issuable under the Previously Approved Plans. At September 30, 2011, options to purchase a total of 205,334 shares of our common stock and a total of 232,501 of unvested restricted shares were outstanding and 2,666 shares remained available for future grants of equity incentives under the 2008 Plan. On that same date, options to purchase a total of 390,667 shares of our common stock were outstanding under our Previously Approved Plans.

The Previously Approved Plans had provided that, if any options outstanding under any of those Plans were to expire or otherwise terminate, rather than being exercised, the shares that had been subject to those options would become available for the grant of new options or other equity incentives under those Plans. However, the 2008 Plan provides, instead, that if any of those options expire or terminate for any reason, then, the number of shares that will become available for grants or awards of equity incentives under the 2008 Plan will be increased by an equivalent number of shares, instead of becoming available for new equity incentive grants under the Previously Approved Plans.

The fair value of each outstanding option is estimated as of the date of grant using a binomial model. This model incorporates certain assumptions including a risk-free market interest rate, expected dividend yield of the underlying common stock, expected option life and expected volatility in the market value of the underlying common stock.

Expected volatilities are based on the historical volatility of the Company’s common stock. The risk free interest rate is based upon market yields for United States Treasury debt securities. The expected dividend yield is based upon the Company’s dividend policy and the fair value of the Company’s shares at the time of grant. Expected lives are based on several factors including the average holding period of outstanding options, their remaining terms and the cycle of our long range business plan.

We used the following weighted average assumptions in estimating the fair values of the options granted in the periods indicated below:


	Nine Months Ended September 30,
	2011			2010
Stock Incentive Plans:
Expected volatility		72.0	%		71.0	%
Risk-free interest rate		2.15	%		2.79	%
Expected dividend yields		N/A			N/A
Expected lives		10 years			10 years

The weighted average grant-date fair values of options granted during the nine months ended September 30, 2011 and 2010 were $1.97 and $3.23, respectively.

The following table summarizes stock option activity during the nine month periods ended September 30, 2011 and 2010:


	Number of Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value
Outstanding at January 1, 2011		652,001		$	5.01
Granted		8,000			2.74
Exercised		(7,000	)		0.82
Forfeited		(57,000	)		7.15

Outstanding at September 30, 2011		596,001		$	4.83		2.6 years	$	274,208

Exercisable at September 30, 2011		526,801		$	5.30		2.4 years	$	177,988

Options vested and expected to vest as of September 30, 2011		592,835		$	4.85		2.6 years	$	269,627

	Number of Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value
Outstanding at January 1, 2010		707,667		$	4.99
Granted		8,000			4.25
Exercised		(33,666	)		1.94
Forfeited		(30,000	)		7.78

Outstanding at September 30, 2010		652,001		$	5.01		3.3 years	$	505,399

Exercisable at September 30, 2010		449,401		$	5.79		3.1 years	$	189,159

The aggregate intrinsic values set forth in the above table represent the total pre-tax intrinsic values (the aggregate differences between the closing stock price of the Company’s common stock on September 30, 2011, and the exercise prices for in-the-money options) that would have been received by the option holders if all in-the-money options had been exercised on September 30, 2011. The total pre-tax intrinsic values of options exercised during the nine months ended September 30, 2011 and 2010 were $21,007 and $72,942, respectively.

A summary of the status of the Company’s nonvested options as of September 30, 2011 and 2010, and changes during the nine month periods ended September 30, 2011 and 2010, is presented below:


	Shares			Weighted Average Grant-Date Fair Value
Nonvested at January 1, 2011		190,100		$	1.11
Granted		8,000			1.97
Vested		(128,900	)		1.37
Forfeited		—			—

Nonvested at September 30, 2011		69,200		$	0.73


	Shares			Weighted Average Grant-Date Fair Value
Nonvested at January 1, 2010		368,500		$	1.20
Granted		8,000			3.23
Vested		(170,150	)		1.63
Forfeited		(3,750	)		2.60

Nonvested at September 30, 2010		202,600		$	1.22

Unrecognized compensation cost related to nonvested options granted under the Company’s 2008 Plan and Previously Approved Plans totaled $24,504 and $149,522 as of September 30, 2011 and 2010, respectively. That cost is expected to be recognized over a weighted average period of 0.5 years in 2011 and 1.6 years in 2010. At September 30, 2011, a total of 592,835 shares of our common stock were subject to outstanding stock options that were exercisable or were expected to become exercisable in the future.

Restricted Shares of Common Stock. During the first three months of 2010, we began granting awards of restricted shares of common stock under the 2008 Plan to some of our officers and other key management employees. Restricted shares generally vest in equal annual increments over a three or four year service period. Compensation expense for such awards, which is based on the fair value of the awards on their respective dates of grant, is recorded over those service periods.

A summary of the status of the Company’s restricted stock activity follows:


	Shares			Weighted Average Grant-Date Fair Value
Outstanding at January 1, 2011		177,000		$	4.15
Granted		114,500			4.47
Vested		(58,999	)		4.15
Forfeited		—			—

Nonvested at September 30, 2011		232,501		$	4.31


	Shares			Weighted Average Grant-Date Fair Value
Outstanding at January 1, 2010		—		$	—
Granted		177,000			4.15
Vested		—			—
Forfeited		—			—

Nonvested at September 30, 2010		177,000		$	4.15

We recognized stock-based compensation expense related to restricted share grants of $105,000 and $116,000 for the quarters ended September 30, 2011 and 2010, respectively, and $330,000 and $306,000 for the nine months ended September 30, 2011 and 2010, respectively, as a component of selling, general and administrative expenses in our condensed consolidated statements of income.

Unrecognized compensation cost related to the nonvested service-condition restricted shares granted under the 2008 Plan totaled approximately $793,900 and $598,000 at September 30, 2011 and 2010, respectively. The cost is expected to be recognized generally over a weighted average period of 1.6 years measured from September 30, 2011 and 2.5 years measured from September 30, 2010. No restricted shares are outstanding under any of our Previously Approved Plans. All 232,501 restricted shares outstanding on September 30, 2011 are expected to vest. The aggregate intrinsic value of these shares of restricted stock, at September 30, 2011 was $616,130.