Note 11—Share-Based Compensation

The Company's 2004 Incentive Plan expired by its terms on April 30, 2011 and no further awards may be granted under it. In 2011, the Company adopted its 2011 Incentive Plan. Up to an aggregate of 7.75 million shares of the Company's common stock may be issued pursuant to awards granted by the Company under the 2011 Incentive Plan. Awards may be granted as incentive and non-statutory stock options, stock appreciation rights, restricted stock awards and restricted stock unit awards, performance-based stock option and restricted stock awards, and other forms of equity-based and cash incentive compensation. Under this plan, 7,264,000 shares remain available for issuance pursuant to future grants at June 30, 2011.

Total compensation cost that has been charged against income related to the above plans was $1.7 million and $1.0 million for the three months ended June 30, 2011 and 2010, respectively, and $3.3 million and $2.3 million for the six months ended June 30, 2011 and 2010, respectively. The exercise of stock options and the vesting of restricted stock during the three and six months ended June 30, 2011 generated an income tax deduction of approximately $1.1 million and $1.3 million, respectively. The Company does not recognize a tax benefit with respect to an excess stock compensation deduction until the deduction actually reduces the Company's income tax liability. At such time, the Company utilizes the net operating losses generated by excess stock-based compensation to reduce its income tax payable and the tax benefit is recorded as an increase in additional paid-in-capital. No income tax benefit was recognized in the consolidated statements of operations for share-based compensation arrangements for the six months ended June 30, 2011 and 2010, respectively.

The following table summarizes stock-based compensation related to the above plans by expense category for the three and six months ended June 30, 2011 and 2010:


	Three Months Ended June 30,				Six Months Ended June 30,
	2011		2010		2011		2010
	(In thousands)
Research and development	$	329	$	399	$	651	$	979
Selling, general and administrative		1,322		561		2,611		1,353


Total non-cash compensation expense related to share-based compensation included in operating expense	$	1,651	$	960	$	3,262	$	2,332

Stock Options

The Company grants stock options to employees and directors with exercise prices equal to the fair market value of the underlying shares of the Company's common stock on the date that the options are granted. Options granted have a term of 10 years from the grant date. Options granted to employees vest over a four-year period and options granted to directors vest in equal quarterly installments over a one-year period from the date of grant. Options to directors are granted on an annual basis and represent compensation for services performed on the Board of Directors. Compensation cost for stock options is charged against income on a straight-line basis between the grant date for the option and each vesting date, except for those options that contain performance and market-based conditions. The Company estimates the fair value of all stock option awards at the closing price on the grant date by applying the Black-Scholes option pricing valuation model. The application of this valuation model involves assumptions that are highly subjective, judgmental and sensitive in the determination of compensation cost.

During the six months ended June 30, 2011, the Company awarded to employees options to purchase an aggregate of approximately 1.5 million shares of common stock. In addition, on April 29, 2011, the Company made an inducement grant outside of the above mentioned plans, pursuant to the NASDAQ inducement grant exception, for the purchase of 50,000 shares of the Company's common stock with an exercise price equal to the closing price of the Company's common stock on the grant date. The option has a ten-year term, will vest and become exercisable as to 12,500 shares on April 29, 2012, and as to an additional 3,125 shares at the end of each successive three-month period thereafter until April 29, 2015. In the event of the termination by the Company without cause or for good reason, the time-based stock option will immediately accelerate and become fully vested.

The weighted-average key assumptions used in determining the fair value of options granted during the six months ended June 30, 2011 and 2010 were as follows:


	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
Weighted-average volatility		100	%		77	%		92	%		78	%
Weighted-average risk-free interest rate		2.5	%		2.8	%		2.5	%		2.9	%
Weighted-average expected life in years		3.7			7.2			3.7			6.9
Dividend yield		0.0	%		0.0	%		0.0	%		0.0	%
Weighted-average grant date fair value per share	$	6.57		$	8.28		$	6.27		$	8.87

Historical information is the primary basis for the selection of the expected volatility and expected dividend yield. The expected terms of options granted prior to December 31, 2007 were based upon the simplified method. The simplified method estimates the expected term as the midpoint between vesting and the grant contractual life. The expected terms of options granted subsequent to December 31, 2007 are based upon the Company's historical experience for similar types of stock option awards. The risk-free interest rate is selected based upon yields of United States Treasury issues with a term equal to the expected life of the option being valued.

During the six months ended June 30, 2011 and 2010, the Company issued 33,000 shares and 188,000 shares, respectively, of common stock upon the exercise of outstanding stock options and received proceeds of $0.2 million and $1.2 million, respectively. For the three months ended June 30, 2011 and 2010, approximately $0.7 million and $0.5 million, respectively, of stock option compensation cost was charged against income. For the six months ended June 30, 2011 and 2010, approximately $1.6 million and $1.3 million, respectively, of stock option compensation cost was charged against income. As of June 30, 2011, there was $5.7 million of unrecognized compensation cost, adjusted for estimated forfeitures, related to unamortized stock option compensation which is expected to be recognized over a weighted-average period of approximately 2.8 years. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures.

Stock option activity during the six months ended June 30, 2011, was as follows:


	Number of Shares			Weighted- Average Exercise Price Per Share		Weighted- Average Remaining Contractual Term (in yrs)		Aggregate Intrinsic Value of In-the- Money Options
	(In thousands, except weighted-average data)
Outstanding at December 31, 2010		2,183		$	8.13		7.13	$	8,710
Granted		1,487			9.62		—		—
Exercised		(33	)		5.08		—		—
Cancelled		(81	)		10.10		—		—

Outstanding at June 30, 2011		3,556		$	8.74		7.74	$	3,683

Exercisable at June 30, 2011		1,519		$	8.18		5.82	$	2,732

The weighted-average grant date per share fair value for options granted during the six months ended June 30, 2011 and 2010 was $6.27 and $8.87, respectively. The aggregate intrinsic value in the previous table reflects the total pre-tax intrinsic value (the difference between the Company's closing stock price on the last trading day of the period and the exercise price of the options, multiplied by the number of in-the-money stock options) that would have been received by the option holders had all option holders exercised their options on June 30, 2011. The intrinsic value of the Company's stock options changes based on the closing price of the Company's common stock. The total intrinsic value of options exercised (the difference in the market price of the Company's common stock on the exercise date and the price paid by the optionee to exercise the option) for the six months ended June 30, 2011 was approximately $0.1 million. The closing price per share of the Company's common stock was $7.49 and $12.60 on June 30, 2011 and 2010, respectively.

Stock Options that Contain Performance or Market-Based Conditions

Performance or Market Conditions

During the six months ended June 30, 2011, the Company recorded $0.3 million compensation expense related to stock option awards that contained performance or market conditions, the vesting of which is contingent upon the achievement of various specific strategic objectives by June 30, 2013. At June 30, 2011, approximately 400,000 potential option shares with performance or market conditions remain unvested. These stock option awards with performance or market conditions encompass performance targets set for senior management personnel through 2013 and could result in approximately $2.7 million of additional compensation expense if the performance targets are met or expected to be attained. In addition, during the six months ended June 30, 2011, the Company made two inducement grants outside of the above mentioned plans, pursuant to the NASDAQ inducement grant exception, to recruit key positions within the Company. On January 31, 2011, the Company awarded a performance-based stock option grant to purchase 250,000 shares of the Company's common stock, with an exercise price equal to the closing price of the Company's common stock on the date of grant, a ten-year term, and that will vest and become exercisable upon the satisfaction of certain performance conditions. In the event that any performance condition is not met, the portion of the option subject to the performance condition will remain outstanding and will vest (subject to the employees continued employment by the Company) upon the earlier of the fourth anniversary of the date of grant and a change of control of the Company. On April 29, 2011, the Company granted performance-based stock options to purchase 50,000 shares of the Company's common stock.

The weighted-average key assumptions used in determining the fair value of stock option awards with performance or market conditions granted during the period ended June 30, 2011 were as follows:


	Three Months Ended June 30,					Six Months Ended June 30,
	2011			2010		2011			2010
Weighted-average volatility		108	%		—		86	%		—
Weighted-average risk-free interest rate		1.1	%		—		2.4	%		—
Weighted-average expected term in years		3.1			—		3.1			—
Dividend yield		0.0	%		—		0.0	%		—
Weighted-average grant date fair value	$	5.01			—	$	5.21			—

A summary of the status of the Company's non-vested stock option awards that contain performance or market conditions as of December 31, 2010 and changes during the six months ended June 30, 2011, is presented below:


	Number of Shares			Weighted-Average Grant Date Fair Value Per Share
	(Shares in thousands)
Non-vested at December 31, 2010		15		$	8.43
Granted		400			5.21
Vested		—			—
Forfeited		(15	)		8.43

Non-vested at June 30, 2011		400		$	5.21

The weighted-average grant date per share fair value for stock option awards that contain performance or market conditions granted during the six months ended June 30, 2011 was $5.21. During the six months ended June 30, 2011, no stock options containing performance or market conditions vested.

Restricted Stock

The Company grants restricted stock and restricted stock unit ("RSU") awards to its employees and to its directors. Restricted stock and RSU awards are recorded as deferred compensation and amortized into compensation expense on a straight-line basis over the vesting period, which ranges from one to four years in duration. Restricted stock and RSU awards to directors are granted on a yearly basis and represent compensation for services performed on the Company's Board of Directors. Restricted stock awards to directors vest in equal quarterly installments over a one-year period from the grant date and RSU awards vest after one-year and thirty-one days. Compensation cost for restricted stock and RSU awards is based on the award's grant date fair value, which is the closing market price of the Company's common stock on the grant date, multiplied by the number of shares awarded. During the six months ended June 30, 2011, the Company issued 751,000 shares of restricted stock amounting to $6.6 million in total aggregate fair market value. For the six months ended June 30, 2011 and 2010, approximately $1.2 million and $1.1 million, respectively, of deferred restricted stock compensation cost was charged against income. At June 30, 2011, approximately 917,000 shares remained unvested and there was approximately $6.9 million of unrecognized compensation cost related to restricted stock and RSUs.

A summary of the status of the Company's unvested restricted stock and RSUs as of December 31, 2010 and changes during the six months ended June 30, 2011, is presented below:


	Number of Shares			Weighted-Average Grant Date Fair Value Per Share
	(Shares in thousands)
Unvested at December 31, 2010		315		$	11.56
Granted		751			8.74
Vested		(110	)		12.46
Forfeited		(39	)		10.82

Unvested at June 30, 2011		917		$	9.17

The weighted-average grant date fair value for restricted stock awards granted during the six months ended June 30, 2011 and 2010 was $8.74 and $11.65 per share, respectively. The total grant date fair value of restricted shares vested during the six months ended June 30, 2011 and 2010, was $1.4 million and $1.5 million, respectively.

Restricted Stock Awards that Contain Performance or Market Conditions

During the six months ended June 30, 2011 and 2010, the Company recorded $187,000 and $50,000, respectively, of compensation expense related to restricted stock awards that contain performance or market conditions. At June 30, 2011, approximately 317,000 shares of restricted stock awards with performance or market conditions remain unvested, and could result in approximately $3.1 million of additional compensation expense if the performance targets are met or expected to be attained.

A summary of the status of the Company's unvested restricted stock awards that contain performance or market conditions as of December 31, 2010 and changes during the six months ended June 30, 2011, is presented below:


	Number of Shares			Weighted-Average Grant Date Fair Value Per Share
	(Shares in thousands)
Unvested at December 31, 2010		39		$	19.37
Granted		300			9.23
Vested		(7	)		13.95
Forfeited		(15	)		20.59

Unvested at June 30, 2011		317		$	9.82

Employee Stock Purchase Plan

In 1998, the Company adopted its 1998 Employee Stock Purchase Plan (the "1998 ESPP"). The 1998 ESPP is qualified as an employee stock purchase plan under Section 423 of the Internal Revenue Code of 1986, as amended. Under the 1998 ESPP, the Company grants rights to purchase shares of common stock ("Rights") at prices not less than 85% of the lesser of (i) the fair market value of the shares on the date of grant of such Rights or (ii) the fair market value of the shares on the date such Rights are exercised. Therefore, the 1998 ESPP is considered compensatory since, along with other factors, it includes a purchase discount of greater than 5%. For each of the six-month periods ended June 30, 2011 and 2010, approximately $0.2 million of compensation expense was charged against income related to participation in the 1998 ESPP.