Stock Options

9 Months Ended

Sep. 30, 2011

Notes to Financial Statements

Note 4 - Stock Options

We periodically grant stock options to employees and directors in accordance with the provisions of our stock option plans, with the exercise price of the stock options being set at the closing market price of the common stock on the date of grant. The intrinsic value of options outstanding and exercisable at September 30, 2011 and 2010 was $185,000 and $118,000, respectively. Options exercised during the nine and three months ended September 30, 2011 were 154,000 and 30,000, respectively. Options exercised during the nine and three months ended September 30, 2010 were 10,500 and 5,500, respectively.

The weighted average fair value of each option granted is estimated on the date of grant using the Black-Scholes option valuation model with the following weighted average assumptions during the nine and three months ended September 30, 2011 and 2010:

	Nine Months Ended September 30,		Three Months Ended September 30,
	2011	2010	2011	2010
Risk free interest rate	2.0%	2.3%	1.5%	0.3%
Expected option lives	5 Years	5 Years	5 Years	5 Years
Expected volatility	117.3%	112.2%	116.1%	99.0%
Estimated forfeiture rate	10%	10%	10%	10%
Expected dividend yields	None	None	None	None
Weighted average grant date fair value of options	$1.84	$1.92	$1.67	$0.88

The Company calculates expected volatility for a stock-based grant based on historic daily stock price observations of its common stock during the period immediately preceding the grant that is equal in length to the expected term of the grant. The expected term of the options and forfeiture rates are estimated based on the Company's exercise and employment termination experience. The risk free interest rate is based on U.S. Treasury yields for securities in effect at the time of grants with terms approximating the expected life of the grants. The assumptions used in the Black-Scholes option valuation model are highly subjective and can materially affect the resulting valuations.

A summary of options granted, exercised, expired and forfeited under our plans and options outstanding as of, and changes made during, the nine months ended September 30, 2011 (in thousands):

	Outstanding		Exercisable
	Number of Options	Weighted Average Exercise Price	Number of Options	Weighted Average Exercise Price
Options outstanding, January 1, 2011	1,260	$     3.19	848	$    3.72
Granted	14	2.25
Exercised (1)	(154)	1.62
Expired	(31)	16.29
Forfeited	(258)	2.94
Options outstanding, September 30, 2011	831	$     3.05	627	$    3.35
(1)  39 common shares were issued in cashless exercises of 154 options.

In the third quarter of 2011, certain options were forfeited resulting in negative stock option compensation of $5,000 for the period. Stock option compensation expense is allocated as follows for the nine and three months ended September 30, 2011 and 2010 (in thousands):

	Nine Months Ended September 30,		Three Months Ended September 30,
	2011	2010	2011	2010
Global managed services	$          35	$          94	$          (3)	$          28
Sales and marketing	8	33	(2)	12
General and administrative	16	67	—	28
	$ 59	$ 194	$ (5)	$ 68

The remaining unrecognized stock-based compensation expense for options at September 30, 2011 was $229,000, of which $197,000, representing 95,000 options, will only be expensed upon a "change in control" and the remaining $32,000 will be amortized over a weighted average period of approximately six months.

The tax benefit recognized for stock-based compensation for the nine and three months ended September 30, 2011 was diminimus. There was no tax benefit recognized for the stock-based compensation for the nine and three months ended September 30, 2010. No compensation costs were capitalized as part of the cost of an asset.