7. Stock Based Compensation

The Company has a 2000 Long-Term Incentive Plan under which 1.4 million shares of common stock were originally reserved for issuance. As of June 30, 2012, there were approximately 1.0 million shares subject to outstanding stock options. This plan expired on August 6, 2010, and thus no further shares are available for future grant under this plan.

The Company also has a 2008 Stock Incentive Plan under which 10.0 million shares of common stock were originally reserved for issuance. The number of shares reserved for issuance under the 2008 Plan was then fixed at 5.0 million shares, after giving effect to the 1-for-7 reverse stock split implemented on May 15, 2012. As of June 30, 2012, there were 0.9 million shares subject to outstanding stock options and 4.1 million shares available for future grant under this plan.

The Company has adopted the provisions of ASC 718, Compensation-Stock Compensation, which requires the measurement and recognition of compensation expense for all stock-based awards made to employees.

For stock options and stock warrants paid in consideration of services rendered by non-employees, the Company recognizes compensation expense in accordance with the requirements of ASC 505-50.

Non-employee option grants that do not vest immediately upon grant are recorded as an expense over the vesting period. At the end of each financial reporting period, the value of these options, as calculated using the Black-Scholes option-pricing model, is determined, and compensation expense recognized or recovered during the period is adjusted accordingly. Since the fair market value of options granted to non-employees is subject to change in the future, the amount of the future compensation expense is subject to adjustment until the common stock options are fully vested.

The following table sets forth the total stock-based compensation expense resulting from stock options and warrants included in the Company's unaudited interim statements of operations:

	Three Months Ended June 30,				Six Months Ended June 30,
	2012		2011		2012		2011
Research and development - employee	$	98,242	$	87,890	$	193,366	$	171,321
General and administrative - employee		263,007		343,682		437,079		541,274
Total employee stock-based compensation	$	361,249	$	431,572	$	630,445	$	712,595

Research and development - non-employee	$	-	$	19,576	$	-	$	41,484
General and administrative - non-employee		176,074		42,908		228,492		88,305
Total non-employee stock-based compensation	$	176,074	$	62,484	$	228,492	$	129,789

During the six-month period ended June 30, 2012, the Company issued stock options to purchase 53,502 shares of its common stock. The fair value of the stock options granted in the current six-month period was estimated using the Black-Scholes option-pricing model, based on the following assumptions:

	Six Months Ended June 30, 2012			Six Months Ended June 30, 2011
Risk-free interest rate		1.54	%		2.13	%
Expected volatility		89.7% - 97.7	%		87.69	%
Expected lives (years)		6 - 10			10
Expected dividend yield		0.00	%		0.00	%

The Company's computation of expected volatility is based on the historical daily volatility of its publicly traded stock. For option grants issued during the six-month period ended June 30, 2012, the Company used a calculated volatility for each grant. The Company uses historical information to compute expected lives. In the six-month period ended June 30, 2012, the contractual term of the options granted was ten years and the Company used between six and ten years as the expected life. The dividend yield assumption of zero is based upon the fact the Company has never paid cash dividends and presently has no intention of paying cash dividends. The risk-free interest rate used for each grant is equal to the U.S. Treasury rates in effect at the time of the grant for instruments with a similar expected life. Based on historical experience, for the six-month period ended June 30, 2012, the Company has estimated an annualized forfeiture rate of 14% for options granted to its employees, 2% for options granted to senior management and 0% for options granted to directors and non-employees. For the comparative six-month period ended June 30, 2011, the Company had estimated an annualized forfeiture rate of 13% for options granted to its employees, 2% for options granted to senior management and 0% for options granted to directors and non-employees. Compensation costs will be adjusted for future changes in estimated forfeitures. The Company will record additional expense if the actual forfeitures are lower than estimated and will record a recovery of prior expense if the actual forfeiture rates are higher than estimated. No amounts relating to employee stock-based compensation have been capitalized.

As of June 30, 2012, there remained approximately $1.2 million of unrecognized compensation expense related to unvested stock options granted to current and former employees, directors and consultants, to be recognized as expense over a weighted-average period of 1.09 years. Presented below is the Company's stock option activity:

	Six Months Ended June 30, 2012
	Number of Options (Employees)			Number of Options (Non-Employees)		Total Number of Options			Weighted-Average Exercise Price
Outstanding at January 1, 2012		1,763,923			143,572		1,907,495		$	6.06
Granted		53,502			-		53,502		$	2.77
Exercised		(2,500	)		-		(2,500	)	$	2.88
Forfeited or expired		(26,384	)		-		(26,384	)	$	4.97
Outstanding at June 30, 2012		1,788,541			143,572		1,932,113		$	5.99
Options exercisable at June 30, 2012		1,238,545			125,715		1,364,260		$	6.94

A summary of the unvested stock options as of June 30, 2012, and changes during the six-month period then ended, is presented below:

	Number of Options (Employees)			Number of Options (Non-Employees)		Total Number of Options			Weighted-Average Grant Date Fair Value per Share
Non-vested at January 1, 2012		693,504			17,857		711,361		$	3.28
Granted		53,502			-		53,502		$	2.32
Forfeited or expired		(26,384	)		-		(26,384	)	$	3.88
Vested		(173,181	)		-		(173,181	)	$	3.26
Non-vested at June 30, 2012		547,441			17,857		565,298		$	3.18

The following table summarizes significant ranges of outstanding stock options under the Company's plans at June 30, 2012:

Range of Exercise Prices	Number of Options		Weighted-Average Remaining Contractual Life (years)		Weighted-Average Exercise Price		Number of Options Exercisable		Weighted-Average Contractual Life		Weighted-Average Exercise Price
$1.96 - 3.00		648,768		8.83	$	2.29		245,220		8.83	$	2.46
$3.01 -7.00		204,942		5.88	$	5.40		195,680		5.88	$	5.39
$7.01 -8.50		946,117		5.64	$	7.66		791,074		5.64	$	7.74
$8.51 - 32.55		132,284		2.33	$	12.75		132,286		2.33	$	12.75
		1,932,113		6.49	$	5.99		1,364,260		6.49	$	6.96

The aggregate intrinsic value of outstanding options as of June 30, 2012 was $2.7 million, which represents the difference between the fair market value of the underlying shares based on the closing price of the Company's common stock on June 29, 2012 of $4.58 and the aggregate exercise price of the options.