14.	Stock-based Compensation

During 1997, we adopted the 1997 Stock Option and Stock Purchase Plan (the “1997 Plan”), which provides for the direct award or sale of shares and for the grant of incentive stock options (“ISOs”) and non-statutory options to employees, directors or consultants. The 1997 Plan, as amended, provides for the issuance of up to 7,000,000 shares of our common stock. The exercise price of ISOs cannot be less than the fair market value of the underlying shares on the date of grant. ISOs can be granted only to employees. The 1997 Plan expired on October 22, 2007.

During 2004, we adopted the 2004 Equity Incentive Plan (the “2004 Plan”), which provides our employees, directors and consultants the opportunity to purchase our common stock through non-qualified stock options, stock appreciation rights, restricted stock units, or restricted stock and cash awards. The 2004 Plan initially provides for issuance of 3,000,000 shares of our common stock, which number may be cumulatively increased (subject to Board discretion) on an annual basis beginning January 1, 2005, which annual increase shall not exceed 2% of our then outstanding stock. As of December 31, 2011, there are 1,050,036 securities remaining and available for future issuances under 2004 Plan, which is exclusive of securities to be issued upon an exercise of outstanding options, warrants, and rights.

In August 2011, stockholders approved 2011 Employee Stock Purchase Plan (ESPP), with a maximum of 500,000 shares of our common stock to be issued under this plan. Under the ESPP, eligible employees may purchase shares of our common stock through payroll deductions, which may not exceed 15% of an employee's compensation. The price at which shares are sold under the ESPP is established by the duly appointed committee of the Board but may not be less than 90% of the lesser of the fair market value per share of our common stock on the offering date or on the purchase date. As of December 31, 20011, there were no stock issuances under this plan and no stock-based compensation was recorded for this plan for the year then ended.

Stock Options

Generally, options issued under the 2004 Plan or the 1997 Plan are subject to four-year vesting, and have a contractual term of 10 years. Most options contain one of the following two vesting provisions:

12/48 of a granted award will vest after one year of service, while an additional 1/48 of the award will vest at the end of each month thereafter for 36 months, or

1/48 of the award will vest at the end of each month over a four-year period.

A summary of activity for the year ended December 31, 2011 is as follows:

	Options			Weighted Average Exercise Price
Balance as of January 1, 2011		7,050,689		$	5.19
Granted		1,113,950		$	5.20
Exercised		(200,755	)	$	3. 82
Expired		(397,496	)	$	7.12
Cancelled/forfeited		(109,204	)	$	4.65
Balance as of December 31, 2011		7,457,184		$	5.13

	Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (years)		Aggregate Intrinsic Value
Balance as of December 31, 2011		7,457,184	$	5.13		5.53	$	34,450
Vested and expected to vest at December 31, 2011		7,417,443	$	5.13		5.52	$	34,271
Exercisable at December 31, 2011		5,636,839	$	5.02		4.57	$	22,181

The total intrinsic value of stock options exercised was $541,000, $1,529,000 and $682,000 for the years ended December 31, 2011, 2010 and 2009, respectively.

The fair value of each option awarded during the year ended December 31, 2011, 2010 and 2009 was estimated on the date of grant using the Black-Scholes-Merton option valuation model based on the following weighted-average assumptions:

	Years ended December 31,
	2011			2010			2009
Expected term	5.5 years			5 years			5 years
Risk-free interest rate		1.95	%		2.22	%		1.94	%
Volatility		72.36	%		72.81	%		66.80	%
Dividends		-			-			-
Resulting weighted average grant date fair value	$	3.24		$	4.02		$	2.34

We calculated the expected term of our stock options based on our historical data. The expected term is calculated for and applied to all employee awards as a single group as we do not expect (nor does historical data suggest) substantially different exercise or post-vesting termination behavior amongst our employee population.

We estimate volatility based on the historical volatility of our daily stock price over the period preceding grant date commensurate with the expected term of the option.

The weighted average risk-free interest rate represents the interest rate for treasury constant maturity instruments published by the Federal Reserve Board. If the term of available treasury constant maturity instruments is not equal to the expected term of an employee option, we use the weighted average of the two Federal Reserve securities closest to the expected term of the employee option.

The dividend yield has been assumed to be zero as we (a) have never declared or paid any dividends and (b) do not currently anticipate paying any cash dividends on our outstanding shares of common stock in the foreseeable future.

Restricted Stock Awards

Generally, restricted stock awards issued under the 2004 Plan are subject to a vesting period that coincides with the fulfillment of service requirements for each award and have a contractual term of 10 years. These awards are amortized to compensation expense over the estimated vesting period based upon the fair value of our common stock on the award date.

A summary of activity for the year ended December 31, 2011 is as follows:

	Restricted Stock Awards			Weighted Average Grant Date Fair Value
Balance as of January 1, 2011		40,269		$	4.88
Granted		61,000		$	5.74
Exercised/Released		(21,528	)	$	4.71
Balance as of December 31, 2011		79,741		$	5.59

	Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (years)		Aggregate Intrinsic Value
Balance as of December 31, 2011		79,741	$	5.59		9.0	$	175,430
Vested and expected to vest at December 31, 2011		79,741	$	5.59		9.0	$	175,430
Exercisable at December 31, 2011		48,241	$	4.94		8.9	$	106,130

Performance-Based Restricted Stock Awards

We granted 246,225 performance-based restricted stock awards under the 2004 Equity Incentive Plan in February 2011. The awards provide certain employees until January 1, 2012 to achieve certain performance goals established by the Compensation Committee. The performance goals are weighted based on the following achievements: obtaining certain FDA clearance or approval (40%), achieving a targeted revenue increase for the fiscal year ended December 31, 2011 (20%), and entering into a major collaboration for development and/or commercialization of the Company's products (40%). To the extent that any of the performance goals are partially achieved, the Compensation Committee maintains the discretion to continue the vesting of all or a portion of the awards following January 1, 2012. Once earned, the awards will remain unvested until January 1, 2013. Termination of employment prior to vesting will result in the forfeiture of any earned (as well as unearned) awards. Effective January 2012, the outstanding awards ceased vesting based upon decision of the Compensation Committee that performance criteria has not been met as of January 1, 2012. No compensation expense was recognized related to these awards during the year ended December 31, 2011. The following table summarizes activity with respect to such awards during the year ended December 31, 2011:

	Restricted Stock Awards		Weighted Average Grant- Date Fair Value
Outstanding at January 1, 2011		0
Granted		246,225	$	5.82
Vested		0
Cancelled/forfeited		0
Outstanding at December 31, 2011		246,225	$	5.82
Vested at December 31, 2011		0

The following summarizes the total compensation cost recognized for the stock options and restricted stock awards in the accompanying financial statements:

	Years ended December 31,
	2011		2010		2009

Total compensation cost for share-based payment arrangements recognized in the statement of operations (net of tax of $0)	$	3,316,000	$	3,055,000	$	2,649,000

As of December 31, 2011, the total unamortized compensation cost related to outstanding unvested stock options and restricted stock awards for all of our plans is approximately $5,782,000. These costs are expected to be recognized over a weighted average period of 1.72 years.

Cash received from stock option and warrant exercises for the years ended December 31, 2011, 2010 and 2009 was approximately $2,849,000, $7,128,000 and $531,000, respectively. No income tax benefits have been recorded related to the stock option exercises as the benefits have not been realized in our income tax returns.

To settle stock options and restricted stock awards, we will issue new shares of our common stock. At December 31, 2011, we have an aggregate of 24,462,062 shares authorized and available to satisfy option exercises under our plans.

Non-Employee Stock Based Compensation

During the third quarter of 2009, we issued 25,000 shares of restricted common stock to a non-employee consultant. The stock is restricted in that it cannot be sold for a specified period of time. There are no vesting requirements. Because the shares issued are not subject to additional future vesting or service requirements, the stock-based compensation expense of $92,000 recorded in the third quarter of 2009 constitutes the entire expense related to this grant, and no future period charges will be incurred.