6. Stock-Based Compensation

We have several approved stock option plans for which stock options and restricted stock awards are available to grant to employees, consultants and directors. All employee and director stock options granted under our stock option plans have an exercise price equal to the market value of the underlying common stock on the grant date. There are no vesting provisions tied to performance conditions for any options, as vesting for all outstanding option grants was based only on continued service as an employee, consultant or director. All of our outstanding stock options and restricted stock awards are classified as equity instruments.

Stock Options

As of September 30, 2011, we had four equity incentive plans:

		· The 1996 Stock Option Plan (the 1996 Plan), which expired in January 2006;
		· The 1998 Non-Officer Stock Option Plan (the 1998 Plan), which expired in June 2008 ;
		· The 2007 Neonode Stock Option Plan (the Neonode Plan), under which we will not grant any additional equity awards; and
		· The 2006 Equity Incentive Plan (the 2006 Plan).

We also had one non-employee director stock option plan as of September 30, 2011:

· The 2001 Non-Employee Director Stock Option Plan (the Director Plan).

A summary of the combined activity under all of the stock option plans is set forth below:

	Number of Options Outstanding		Exercise Price Per Share			Weighted Average Exercise Price
Outstanding at January 1, 2011		19,804	$	$	35.39 - 687.50	$	102.75
Granted		---			---		---
Cancelled or expired		480	$	$	135.00 - 687.50	$	521.67
Exercised		---			---		---
Outstanding at September 30, 2011		19,324	$	$	35.39 - 687.50	$	92.19

The aggregate intrinsic value of the 19,324 stock options that are outstanding, vested and expected to vest at September 30, 2011 is $0.

The 1996 Plan terminated effective January 17, 2006, and the 1998 Plan terminated effective June 15, 2008. Although we can no longer issue stock options out of the plans, the outstanding options at the date of termination will remain outstanding and vest in accordance with their terms. Options granted under the Director Plan vest over a one to four-year period, expire five to seven years after the date of grant and have exercise prices reflecting market value of the shares of our common stock on the date of grant. Stock options granted under the 1996, 1998 and 2006 Plans are exercisable over a maximum term of ten years from the date of grant, vest in various installments over a one to four-year period and have exercise prices reflecting the market value of the shares of common stock on the date of grant.

The Neonode Plan has been designed for participants (i) who are subject to Swedish income taxation (each, a Swedish Participant) and (ii) who are not subject to Swedish income taxation (each, a Non-Swedish Participant). The options issued under the plan to the Non-Swedish Participant are five year options. We will not grant any additional equity awards out of the Neonode Plan.

We did not grant any options to purchase shares of our common stock to employees or members of our Board of Directors during the nine months ended September 30, 2011 and 2010.

Warrants

We issued 80,000 five-year stock purchase warrants at an exercise price of $2.50 per share to our legal advisor during the nine months ended September 30, 2011. We also issued 20,000 three-year stock purchase warrants at an exercise price of $2.00 per share to one of our US based employees during the nine months ended September 30, 2011. In addition, we issued 20,000 three-year stock purchase warrants at an exercise price or $4.05 per share to an engineering consultant during the nine months ended September 30, 2011. The warrants to purchase an aggregate of 120,000 shares of our common stock vested on the date of grant. We issued 20,000 three-year stock purchase warrants at an exercise price or $3.90 per share with a vesting period over 24 months to an employee during the three months ended September 30, 2011. The stock underlying the stock purchase warrants granted to our employee, consultant and legal advisor has not been registered for resale. The vested warrant granted to our legal advisor has a fair value on the date of grant of $193,000 and is included in general and administrative expense for the nine months ended September 30, 2011. The vested warrant granted to our employee has a fair value on the date of grant of $37,000 and is included in product research and development expense for the nine months ended September 30, 2011. The vested warrant granted to our engineering consultant has a fair value on the date of grant of $73,000 and is included in product research and development expense for the nine months ended September 30, 2011. The unvested warrant granted to an employee has a fair value on the date of grant of $75,000. This amount will be expensed over the vesting period and $2,350 of expense related to this warrant is included in product research and development expense for the three and nine months ended September 30, 2011. The fair value of stock-based compensation related to the employee warrants is calculated using the Black-Scholes option pricing model as of the grant date of the underlying warrant.

The stock-based compensation expense reflects the fair value of the vested portion of options and warrants for the recipients at the date of issuance plus the amortization of the unvested portion of the stock options, and warrants and the cost of warrant exercises paid by the Company. Employee and director stock-based compensation expense related to stock options and warrants, the amortization of the fair value of common stock and the cost of warrant exercises in the accompanying consolidated statements of operations and comprehensive loss is as follows (in thousands):

		Three months ended September 30, 2010				Three months ended September 30, 2011
Stock-based compensation		$	36			$	45

		Nine months ended September 30, 2010				Nine months ended September 30, 2011				Remaining unamortized expense at September 30, 2011
Stock-based compensation		$	3,275			$	517			$	188

The remaining unamortized expense related to stock options and warrants will be recognized on a straight line basis monthly as compensation expense over the remaining vesting period which approximates two years.

See Note 5 for assumptions used to value warrants and embedded conversion features during the nine months ended September 30, 2011.

A summary of all warrant activity is set forth below:

	September 30, 2011
Outstanding and exercisable	Warrants			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life
January 1, 2011		5,139,489		$	0.57		3.56
Issued		809,543		$	3.08		4.31
Expired/forfeited		--			--		--
Exercised		(543,426	)	$	1.04		2.99
Outstanding and exercisable, September 30, 2011		5,405,606		$	1.57		2.70

In the nine months ended September 30, 2011, the Company issued 422,830 new five-year common stock purchase warrants, with an exercise price of 3.13 per share (see Note 3).

In March 2011, the Company entered into a warrant agreement with investors who participated in the Company’s 2009 and 2010 financing transactions and who had been issued common stock purchase warrants with exercise prices of $0.50 per share, $1.00 per share, and $1.38 per share (the “2009 and 2010 Warrants”). Pursuant to the warrant agreement, each warrant holder who exercised some or all of its outstanding 2009 and 2010 Warrants at the applicable exercise price ($0.50 per share, $1.00 per share, and/or $1.38 per share), received a number of March 2011 Warrants equal to fifty percent (50%) of the number of 2009 and 2010 Warrants exercised by such warrant holder. The warrant holders exercised an aggregate of 493,426 outstanding 2009 and 2010 Warrants, for an aggregate investment of $515,000 and received 493,426 shares of common stock and 246,713 new five-year common stock purchase warrants, with an exercise price of $3.13 per share. The March 2011 Warrants may be exercised by cash payment or through cashless exercise by the surrender of warrant shares having a value equal to the exercise price of the portion of the warrants being exercised.

On April 25, 2011, Davisa Ltd. exercised warrants to purchase 50,000 shares of common stock. The Company recorded an additional $50,000 as stock based compensation to compensate Davisa Ltd. by waiving the $1.00 exercise price, and issued 50,000 shares of our common stock to Davisa Ltd. for services provided for the private placement of convertible notes and warrants in the March 2011 financing transaction.

The fair value of stock-based awards to employees is calculated using the Black-Scholes option pricing model, even though this model was developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which differ significantly from our stock options. The Black-Scholes model also requires subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect the calculated values. The expected term and forfeiture rate of options granted is derived from historical data on employee exercises and post-vesting employment termination behavior, as well as expected behavior on outstanding options. The risk-free rate is based on the U.S. Treasury rates in effect during the corresponding period of grant. The expected volatility is based on the historical volatility of our stock price. These factors could change in the future, which would affect fair values of stock options granted in such future periods, and could cause volatility in the total amount of the stock-based compensation expense reported in future periods.

Below is a summary of Outstanding Warrants to Purchase Common Stock as of September 30, 2011:

Description	Issue Date	Exercise Price		Shares	Expiration Date

September 2007 Investor Warrant	9/26/2007	$	31.75	233		9/26/2012
August 2009 Employee Warrants	8/25/2009	$	0.50	440,000		8/25/2016
January 2010 Investor Warrant	1/28/2010	$	1.00	40,000		1/28/2013
2007 Debt Extension Warrants	9/22/2010	$	1.00	16,000		9/22/2015
September 2010 Repricing Warrant	9/28/2010	$	1.38	25,000		9/28/2013
October 2010 Repricing Warrants	10/18/2010	$	1.38	2,434,830		10/18/2013
October 2010 Employee Warrants	10/15/2010	$	1.38	1,440,000		10/15/2013
December 2010 Employee Warrants	12/3/2010	$	1.63	200,000		12/3/2015
January 2011 Employee Warrant	1/21/2011	$	2.00	20,000		1/21/2014
February 2011 Legal Advisor Warrant	2/22/2011	$	2.50	80,000		2/22/2016
March 2011 Investor Warrants	3/9/2011	$	3.13	620,443		3/9/2016
March 2011 Investor Warrants	4/7/2011	$	3.13	49,100		4/7/2016
May 2011 Consultant Warrant	5/17/2011	$	4.05	20,000		5/17/2014
September 2011 Employee Warrant	9/12/2011	$	3.90	20,000		9/12/2014
Total Warrants Outstanding				5,405,606