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7. STOCK-BASED COMPENSATION

9 Months Ended

Sep. 30, 2012

The Company records stock-based compensation in accordance with ASC No. 718, Compensation – Stock Compensation. The Company estimates the fair value of stock options using the Black-Scholes option pricing model. The fair value of stock options granted is recognized as expense over the requisite service period. Stock-based compensation expense for all share-based payment awards is recognized using the straight-line single-option method.

The Company uses the historical stock price volatility as an input to value its stock options under ASC No. 718. The expected term of stock options represents the period of time options are expected to be outstanding and is based on observed historical exercise patterns of the Company, which the Company believes are indicative of future exercise behavior. For the risk-free interest rate, the Company uses the observed interest rates appropriate for the term of time options are expected to be outstanding. The dividend yield assumption is based on the Company’s history and expectation of dividend payouts.

The following weighted-average assumptions were used for grants issued during the three and nine months ended September 30, 2012 and 2011 under the ASC No. 718 requirements.

	Three months ended September 30,		Nine months ended September 30,
	2012	2011	2012	2011
Weighted-average risk-free rate	0.49%	0.90%	0.54%	1.56%
Weighted-average volatility	95.08%	97.58%	95.33%	97.50%
Dividend yield	0.00%	0.00%	0.00%	0.00%
Expected life	5.59 years	6.61 years	5.72 years	5.18 years

ASC No. 718 requires forfeitures to be estimated at the time of grant and revised if necessary in subsequent periods if actual forfeiture rates differ from those estimates. Forfeitures were estimated based on historical activity of the Company. Stock-based compensation expense for the three months ended September 30, 2012 and 2011 was $26,000 and $88,000, respectively, and $163,000 and $242,000 for the nine months ended September 30, 2012 and 2011, respectively, and is expensed in selling, general and administrative expenses and credited to additional paid-in-capital. The Company granted 335,000 and 58,300 stock options during the three months ended September 30, 2012 and 2011, respectively, and 445,000 and 967,800 stock options during the nine months ended September 30, 2012 and 2011, respectively.

- Definition

Disclosure of accounting policy for stock option and stock incentive plans. This disclosure may include (1) the types of stock option or incentive plans sponsored by the entity (2) the groups that participate in (or are covered by) each plan (3) significant plan provisions and (4) how stock compensation is measured, and the methodologies and significant assumptions used to determine that measurement.

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