6. Stock Based Compensation

Stock Options

As of September 30, 2012, we had two equity compensation plans under which we were granting stock options and shares of non-vested stock. We may grant 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 30, 2015, when the 2000 Plan was amended in May 2005 after approval by our shareholders. At the 2011 annual meeting of shareholders, the Company's shareholders approved an amendment to the 2000 Plan to reserve an additional 3 million shares of common stock. As of September 30, 2012, 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. The 2000 ESPP which, following the appropriate shareholder approval was subsequently amended in 2005 and 2006, provides for the issuance of a maximum of 150,000 shares of our common stock to participating employees. The Company did not offer employees the right to purchase common stock under the ESPP during the first nine months of 2012.

The following table summarizes stock option activity for the nine months ended September 30, 2012:

	Number of Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life in Years		Aggregate Intrinsic Value
Options outstanding at December 31, 2011		891,751		$	5.15
Granted		932,384			3.63
Exercised		-			-
Forfeited		(78,525	)		3.03
Cancelled		(55,251	)		18.93
Options outstanding at September 30, 2012		1,690,359			3.96		8.11	$	1,600,309
Vested and expected to vest at September 30, 2012		1,558,961			4.00		7.97	$	1,464,563
Exercisable at September 30, 2012		310,000			5.72		1.51	$	156,712
Non vested		1,380,359
Weighted average remaining recognition period (in years)		3.65

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 nine months ended September 30, 2012.

Volatility	1.2	%
Risk-free interest rate	0.6	%
Dividend yield	0.0	%
Expected option term (in years)	6.25

The volatility factor was estimated based on the Company's historical volatility. 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 a historical percentage of actual option forfeitures since the business combination on December 1, 2010.

The Company recognized stock-based compensation expense related to stock options of approximately $0.4 million and $0.1 million for the three months ended September 30, 2012 and 2011, respectively. General and administrative expenses include $0.3 million and less than $0.1 million and research and development expenses include $0.1 million and less than $0.1 million of stock-based compensation expense in the consolidated statement of operations for the three months ended September 30, 2012 and 2011, respectively.

The Company recognized stock-based compensation expense related to stock options of approximately $0.7 million and $0.2 million for the nine months ended September 30, 2012 and 2011, respectively. General and administrative expenses include $0.5 million and $0.1 million and research and development expenses include $0.2 million and $0.04 million of stock-based compensation expense in the consolidated statement of operations for the nine months ended September 30, 2012 and 2011, respectively. As of September 30, 2012, there was $3.3 million of unrecognized compensation expense related to unvested stock options, which is expected to be recognized over a weighted average period of 3.65 years.

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. RS shares vest upon the completion of a specific period of continued service or our achievement of certain performance metrics. Each 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 are valued at the market price of our common stock on the date of grant and RSUs are valued based on the market price on the date of settlement. 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.

No RS was issued or outstanding during the nine months ended September 30, 2012. A summary of RSU activity for the nine months ended September 30, 2012 is as follows:

				Weighted
	Number of			Average
	RSU's			Grant Price
Outstanding at December 31, 2011		487,025		$	6.37
Granted		61,011			3.44
Released		(43,819	)		5.98
Forfeited		(8,559	)		5.78
Outstanding at September 30, 2012		495,658		$	5.11
Expected to Vest		351,013		$	5.68

The Company recognized stock-based compensation expense related to RSUs of approximately $0.1 million and $0.4 million for the three months ended September 30, 2012 and 2011, respectively. General and administrative expenses include less than $0.1 million and $0.3 million and research and development expenses include less than $0.1 million and $0.1 million of stock-based compensation expense in the consolidated statement of operations for the three months ended September 30, 2012 and 2011, respectively.

The Company recognized stock-based compensation expense related to RSUs of approximately $0.8 million and $0.9 million for the nine months ended September 30, 2012 and 2011, respectively. General and administrative expenses include $0.5 million and $0.6 million and research and development expenses include $0.3 million and $0.3 million of stock-based compensation expense in the consolidated statement of operations for the nine months ended September 30, 2012 and 2011, respectively. As of September 30, 2012, there was $1.2 million of unrecognized compensation expense related to unvested RSUs, which is expected to be recognized over a weighted average period of 1.05 years.

A total of approximately 1.0 million shares of common stock were reserved for issuance at September 30, 2012 in connection with RSUs, stock options, stock warrants and the employee stock purchase plan.