7. Stock Based Compensation

Stock Warrants

The following table summarizes warrant activity for the years ended December 31, 2011, 2010 and 2009 as follows:

				Weighted
	Number of			Average
	Warants			Exercise Price
Outstanding at January 1, 2009		1,095,026		$	13.20
Exercised		(292,745	)		11.90
Expired		(283,195	)		17.00
Outstanding at December 31, 2009		519,086			11.80
Expired		(361,532	)		12.20
Outstanding at December 31, 2010		157,554			11.00
Outstanding at December 31, 2011		157,554		$	11.00

All warrants have an expiration date of May 2012.

Stock Options

As of December 31, 2011, we had two equity compensation plans under which we were granting stock options and shares of non-vested stock. We are currently granting stock-based awards from our Amended and Restated 2000 Stock Incentive Plan (the 2000 Plan) and our Amended and Restated 2000 Employee Stock Purchase Plan (the 2000 ESPP). Both the 2000 Plan and the 2000 ESPP are administered by the Compensation Committee of the Board of Directors and the Board of Directors (the “Board”).

The 2000 Plan was originally adopted by the Board and approved by our shareholders in 2000. Its original ten-year term was extended to March 15, 2015, when the 2000 Plan was last amended. Under the terms of the 2000 Plan, we are authorized to grant a variety of incentive awards based on our common stock, including stock options (both incentive options and non-qualified options), performance shares and other stock awards. At the 2011 annual meeting of shareholders held on May 18, 2011, the Company's shareholders approved three million additional shares to be set aside for current and future use under the 2000 Plan. As of December 31, 2011, the 2000 Plan provides for the issuance of a maximum of 3.9 million shares of common stock. These shares are reserved for awards to all participants in the 2000 Plan, including non-employee directors.

The 2000 ESPP was adopted by the Board on April 5, 2000, and approved by our shareholders on the same date. It was amended by the Board to increase the number of shares available for issuance, and such amendment was approved by our shareholders on May 11, 2005. The 2000 ESPP was subsequently amended and restated by action of the Board on October 4, 2006, and the amendment and restatement was approved by our shareholders on December 14, 2006. Under the terms of the 2000 ESPP, eligible employees have the opportunity to purchase our common stock at a discount. An option gives its holder the right to purchase shares of our common stock, up to a maximum value of $0.02 million per year. The 2000 ESPP provides for the issuance of a maximum of 150,000 shares of our common stock to participating employees.

The following table summarizes stock option activity for the years ended December 31, 2011, 2010 and 2009 as follows:

	Number of Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life in Years		Aggregate Intrinsic Value
Options outstanding at January 1, 2009		428,224		$	21.00
Granted		-			-
Exercised		(53,365	)		10.90
Forfeited		(34,254	)		15.46
Cancelled		(81,330	)		23.48
Options outstanding at December 31, 2009		259,275		$	23.00		1.99	$	45,620
Vested and expected to vest at December 31, 2009		258,953		$	23.06		1.99	$	45,511
Exercisable at December 31, 2009		237,000		$	23.90		1.93	$	39,371

Options outstanding at December 31, 2009		259,275		$	23.00
Granted		-			-
Exercised		-			-
Cancelled		(45,000	)		48.04
Options outstanding at December 31, 2010		214,275		$	18.43		1.34	$	9,880
Vested and expected to vest at December 31, 2010		214,275		$	18.43		1.34	$	9,880
Exercisable at December 31, 2010		214,275		$	18.43		1.34	$	9,880

Options outstanding at December 31, 2010		214,275		$	18.43
Granted		766,000			3.77
Exercised		(5,200	)		6.16
Cancelled		(83,324	)		26.57
Options outstanding at December 31, 2011		891,751			5.15		8.48	$	11,352
Vested and expected to vest at December 31, 2011		816,414			5.30		8.36	$	10,114
Exercisable at December 31, 2011		125,751			13.54		0.83	$	-

The Company calculates the fair value of stock options based upon the Black-Scholes-Merton valuation model. The following table summarizes the fair value and assumptions used in determining the fair value of stock options issued during the year ended December 31, 2011.

	2011

Volatility		111.6%
Risk-free interest rate		0.9%
Dividend yield		0.0%
Expected option term (in years)		6.25

For the year ended December 31, 2011, the volatility factor was based on the Company's historical volatility since the closing of the Merger on December 1, 2010. The expected life was determined using the simplified method as described in ASC Topic 718, “Accounting for Stock Compensation”, which is the midpoint between the vesting date and the end of the contractual term. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the date of grant. Forfeitures are based on actual percentage of option forfeitures since the closing of the Business Combination on December 1, 2010, and is the basis for future forfeiture expectations.

For the years ended December 31, 2010 and 2009 the Company did not grant stock options and therefore used the calculated 2008 Black-Scholes-Merton valuation model. The weighted-average grant-date fair value of stock options awarded was estimated on the date of grant using the following assumptions in 2008: risk-free interest rate of 2.42%, no dividends, volatility of 107% and an expected life of 4.07 years. The volatility factor was estimated based on the Company's historical volatility. The Company also used historical data to derive the option's expected life and employee forfeiture rates within the valuation model. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the date of grant. The dividend yield is predicated on the current annualized dividend payment.

The Company recognized stock-based compensation expense related to stock options of approximately $0.3 million, $0.4 million $0.2 million for the years ended December 31, 2011, 2010 and 2009, respectively. General and administrative expenses include $0.2 million, $0.03 million and $0.1 million and research and development expenses include $0.1 million, $0.01 million and $0.1 million of stock-based compensation expense in the consolidated statement of operations for the years December 31, 2011, 2010 and 2009, respectively. As of December 31, 2011, there was $2.2 million of unrecognized compensation expense related to unvested stock options, which is expected to be recognized over a weighted average period of 3.74 years. As of December 31, 2010, there were zero unvested shares.

Restricted Stock and Restricted Stock Units

In May 2008, under the 2000 Plan, we began granting Restricted Stock (RS) and Restricted Stock Units (RSUs) to eligible employees, including our executives. Each RS and RSU represents a right to receive one share of our common stock upon the completion of a specific period of continued service or our achievement of certain performance metrics. Shares of RS and RSUs are generally valued at the market price of our common stock on the date of grant. RSUs granted in the first quarter of 2011 were accounted for as liability awards as they would have been cash settled until additional shares were authorized for issuance under the 2000 plan. On the date these additional shares were authorized, the RSUs were converted to equity awards and were valued at the market price of our common stock. We recognize noncash compensation expense for the fair values of these RS and RSUs on a straight-line basis over the requisite service period of these awards, which is generally three years.

The following table summarizes RS and RSU activity for the years ended December 31, 2011, 2010 and 2009 as follows:

				Weighted					Weighted
	Number of			Average		Number of			Average
	RS			Grant Price		RSU's			Grant Price
Outstanding at January 1, 2009		315,553		$	6.04		184,661		$	6.04
Granted		149,204			17.10		36,823			17.10
Exercised		(455,985	)		9.58		(221,484	)		7.88
Outstanding at December 31, 2009		8,772			17.10		-			-
Granted		30,270			8.80		-			-
Exercised		(39,042	)		10.72		-			-
Outstanding at December 31, 2010		-			-		-			-
Granted		-			-		491,255			6.36
Forfeited		-			-		(4,230	)		5.13
Outstanding at December 31, 2011		-		$	-		487,025		$	6.37
Expected to Vest							447,839			6.36

The Company recognized stock-based compensation expense related to RS and RSU's of approximately $1.3 million, $0.3 million and $2.3 million for 2011, 2010 and 2009, respectively. General and administrative expenses include $0.9 million, $0.2 million and $1.2 million and research and development expenses include $0.4 million, $0.1 million and $1.1 million of stock-based compensation expense in the consolidated statement of operations for the years ended December 31, 2011, 2010 and 2009, respectively. As of December 31, 2011, there was $2.8 million of unrecognized compensation expense related to unvested RSUs, which is expected to be recognized over a weighted average period of 2.0 years. As of December 31, 2011 there were zero vested RSU's.

A total of approximately 2.1 million shares of common stock were reserved for issuance at December 31, 2011, in connection with restricted stock, restricted stock units, stock options, stock warrants and the 2000 employee stock purchase plan.