We follow FASB ASC 718, "Compensation - Stock Compensation" ("ASC 718") to account for stock-based compensation.  ASC 718 requires all stock-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values.

The Company has certain stock option plans under which it awards incentive and non-qualified stock options to employees, officers, and outside directors.  Stock options granted to employees have either a ten year contractual term with one-fifth yearly vesting over a five year period or a six year contractual term with one-third yearly vesting over a three year period.  Stock options granted to outside directors have a ten year contractual term with vesting period of six months.

No stock options were granted during the first six months of 2012 or 2011.

As of June 30, 2012, we had an aggregate of 1,818,500 employee stock options outstanding (from the 1993 Non-Qualified Stock Option Plan, 2004 and 2010 Stock Option Plans, and a Non-Qualified Stock Option Agreement noted below), of which 1,268,500 are vested.  The weighted average exercise price of the 1,268,500 outstanding and fully vested employee stock options is $2.13 with a remaining weighted contractual life of 1.79 years.  Additionally, we had an aggregate of 796,000 outstanding director stock options (from the 1992 and 2003 Outside Directors Stock Plans), all of which are vested. The weighted average exercise price of the 796,000 outstanding and fully vested director stock options is $2.13 with a remaining weighted contractual life of 4.89 years.

The Company granted a non-qualified stock option (the "Option") which allows for the purchase of up to 250,000 shares of the Company's Common Stock at $1.35 per share by Mr. Christopher Leichtweis, who was appointed a Senior Vice President of the Company and the President of SEC upon the closing of the acquisition of SEC on October 31, 2011.  The Option was granted in accordance with, and is subject to, the Non-Qualified Stock Option Agreement, dated October 31, 2011.  The Option has a term of 10 years from grant date, with 25% yearly vesting over a four-year period.

The Company estimates fair value of stock options using the Black-Scholes valuation model.  Assumptions used to estimate the fair value of stock options granted include the exercise price of the award, the expected term, the expected volatility of the Company's stock over the option's expected term, the risk-free interest rate over the option's expected term, and the expected annual dividend yield.

The following table summarizes stock-based compensation recognized for the three and six months ended June 30, 2012 and 2011 for our employee and director stock options.

We recognized stock-based compensation expense using a straight-line amortization method over the requisite period, which is the vesting period of the stock option grant.  ASC 718 requires that stock based compensation expense be based on options that are ultimately expected to vest.  ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.  We have generally estimated forfeiture rate based on historical trends of actual forfeitures.  When actual forfeitures vary from our estimates, we recognize the difference in compensation expense in the period the actual forfeitures occur or when options vest.  As of June 30, 2012, we have approximately $337,000 of total unrecognized compensation cost related to unvested options, of which $68,000 is expected to be recognized in the remainder of 2012, $135,000 in 2013, $96,000 in 2014, with the remaining $38,000 in 2015.