We have three 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.

	Number of Options Outstanding			Weighted Average Exercise Price
Outstanding at January 1, 2013		1,715,200		$	5.04
Granted		130,000			6.12
Cancelled or expired		(18,256	)		5.57
Exercised		(182,361	)		4.44
Outstanding at September 30, 2013		1,644,583		$	5.18

During the nine months ended September 30, 2013, the Company received an aggregate of $524,000 from four employees in connection with the exercise of stock options into 120,011 shares of common stock. During the nine months ended September 30, 2013, four option holders provided the Company with notice to exercise 62,350 stock options. The Company recorded a stock subscription receivable of $286,000 as of September 30, 2013 related to the net proceeds in consideration for the exercise of the 62,350 stock options. The proceeds were received in October 2013. The intrinsic value of the options exercised was $409,000 on the date of exercise.

We granted options to purchase 130,000 shares of our common stock to three employees during the nine months ended September 30, 2013 with an aggregate grant date fair value of $682,500 computed using the Black-Scholes option pricing model. The options have a 7-year life and 1/3 of the options are vested on the one year anniversary date of grant with the remaining to vest monthly over the remaining 24-months.

During the three and nine months ended September 30, 2012, we granted 45,000 and 1,145,000 options to purchase shares of our common stock to employees and 0 and 360,000 options to purchase shares of our common stock to members of our Board. The options have a 7-year life and 1/3 of the options are vested on the date of grant with the remaining to vest monthly over the remaining 24-months.

For the three and nine months ended September 30, 2013, the Company recorded $0.7 million and $1.9 million, respectively, of compensation expense related to the vesting of stock options. For the three and nine months ended September 30, 2012, the Company recorded $0.6 million and $2.9 million, respectively, of compensation expense related to the vesting of stock options. The fair value of the stock-based compensation was calculated using the Black-Scholes option pricing model as of the date of grant of the stock option.

The 1998 Plan terminated effective June 15, 2008 and the Director Plan terminated effective March 2011. 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 vested 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 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.

During the nine months ended September 30, 2013, certain warrant holders exercised their warrants under the cash and cashless exercise provisions, as defined in the agreements. See Note 3 for details of such exercises and number of common stock shares issued.

On December 3, 2010, we issued 120,000 warrants at an exercise price of $1.63 per share to an employee. The fair value of the warrants was $198,000 on the date of grant, using the Black-Scholes option pricing model, which has been amortized to expense over 24 months. During the nine months ended September 30, 2012, we recorded $25,000 of stock based compensation expense related to vesting of such warrants.

On September 12, 2011, we issued 20,000 three-year stock purchase warrants to an employee at an exercise price of $3.90 per share with a vesting period over 24 months. The warrant granted to an employee had a fair value on the date of grant of $75,000. This amount is expensed over the vesting period of which $6,000 and $25,000 and $9,000 and $28,000 of expense related to this warrant is included in product research and development expense for the three and nine months ended September 30, 2013 and 2012, respectively. The fair value of stock-based compensation related to the issuance of warrants is calculated using the Black-Scholes option pricing model as of the grant date of the underlying warrant.

On April 4, 2013, we extended a 40,000 stock purchase warrant with an exercise price of $1.00 per share that expired on January 28, 2013 that was issued to an investor in a previous convertible debt financing. The fair value of the warrant was $166,000 on the date of grant, using the Black-Scholes option pricing model, which has been expensed during the nine months ended September 30, 2013. The warrant holder exercised the warrant on April 4, 2013 and the Company received cash proceeds of $40,000 (see Note 3).

The stock-based compensation expense for the three and nine months ended September 30, 2013 and 2012 reflects the fair value of the vested portion of options and warrants granted to directors, employees and non-employees. Stock-based compensation expense in the accompanying consolidated statements of operations is as follows (in thousands):

	Three months ended September 30,				Nine months ended September 30,
	2013		2012		2013		2012
Product research and development	$	69	$	73	$	187	$	260
Sales and marketing	$	364		250		749		1,200
General and administrative	$	329		284		1,165		1,497
Stock compensation expense	$	762	$	607	$	2,101	$	2,957

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 option pricing 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.

	September 30, 2013
Outstanding and exercisable	Warrants			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life
January 1, 2013		4,704,636		$	1.61		1.41
Issued		--			--		--
Expired/forfeited		--			--		--
Exercised		(3,871,063	)		1.45		--
Outstanding and exercisable, September 30, 2013		833,573		$	2.40		2.31

Below is a summary of Outstanding Warrants to Purchase Common Stock as of September 30, 2013:

Description	Issue Date	Exercise Price		Shares	Expiration Date

August 2009 Employee Warrants	8/25/2009	$	0.50	80,000	8/25/2016
2007 Debt Extension Warrants	9/22/2010	$	1.00	16,000	9/22/2015
December 2010 Employee Warrants	12/3/2010	$	1.63	200,000	12/3/2015
January 2011 Employee Warrant	1/21/2011	$	2.00	7,000	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	376,473	3/9/2016
March 2011 Investor Warrants	4/7/2011	$	3.13	34,100	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				833,573