3. STOCK COMPENSATION

Stock Options

The Company previously sponsored a 2002 Equity Incentive Plan (the "2002 Plan") pursuant to which it issued options to purchase its common stock to the Company's employees, directors and service providers. In June 2011, the 2002 Plan was replaced by the 2011 Equity Incentive Plan (the "2011 Plan" and, together with the 2002 Plan, the "Plans") following approval by the Company's shareholders. There will be no further grants under the 2002 Plan, but awards previously granted pursuant to the 2002 Plan will continue to be governed by its terms. The 2011 Plan allows for the grant of stock options, stock appreciation rights, restricted stock awards, restricted stock units, performance shares and performance units.

In general, stock options granted under the 2002 Plan prior to December 31, 2010 vest over a three year period, with one-third of the underlying shares vesting on each anniversary of grant, and have a ten year term. Beginning in January 2011, stock options granted under the 2002 Plan vest over a four year period, with one-fourth of the underlying shares vesting on the first anniversary of the grant and 1/48th of the underlying shares vesting monthly thereafter, such that the underlying shares will be fully vested on the fourth anniversary of the grant.

In general, stock options granted under the 2011 Plan have a ten year term and typically vest over a four year period, with one-fourth of the underlying shares vesting on the first anniversary of the grant and 1/48th of the underlying shares vesting monthly thereafter, such that the underlying shares will be fully vested on the fourth anniversary of the grant. The maximum number of shares that may be issued under the 2011 Plan is 15,072,457 including 2,072,457 shares reserved but not issued under the 2002 Plan. In addition, shares subject to outstanding awards under the 2002 Plan that expire or otherwise terminate without having been exercised in full, or are forfeited to or repurchased by the Company, will be available for issuance under the 2011 Plan, up to a maximum of 11,086,073 shares. As a result of 2002 Plan awards canceled after inception of the 2011 Plan, an additional 1,795,831 shares are available for future grants under the 2011 Plan.

As of December 31, 2011, 12,284,538 shares of common stock remained available for future grant under the 2011 Plan.

During the year ended December 31, 2011, in connection with their appointments as officers of the Company, certain officers were granted options to purchase 650,000, 800,000 and 850,000 shares of the Company's common stock at exercise prices of $2.58, $1.76, and $1.38, respectively. These options were granted outside of the Plans and have vesting schedules consistent with other grants made in 2011. The shares underlying these options are included in the following stock option tables.

A summary of the Company's stock option activity with respect to 2011, 2010 and 2009 follows:


	For the year ended December 31,
	2011					2010					2009
	Shares			Weighted Average Exercise Price		Shares			Weighted Average Exercise Price		Shares			Weighted Average Exercise Price
Options outstanding at beginning of year		8,490,055		$	2.14		8,932,811		$	2.79		7,540,873		$	3.34
Granted		9,572,250			1.53		3,607,365			1.58		2,727,000			1.10
Exercised		(151,743	)		1.09		(1,701,630	)		1.18		(62,711	)		1.68
Canceled or expired		(3,404,705	)		1.65		(2,348,491	)		4.42		(1,272,351	)		2.72

Options outstanding at end of year		14,505,857		$	1.86		8,490,055		$	2.14		8,932,811		$	2.79

Exercisable at end of year		4,453,266		$	2.60		3,919,519		$	2.93		5,119,227		$	3.94

Vested at December 31, 2011 and expected to vest		13,867,936		$	1.88


	Aggregate Intrinsic Value		Weighted Average Remaining Contractual Life (Years)
Options outstanding at end of year	$	37,290		6.94

Exercisable at end of year	$	3,090		3.30

Vested at December 31, 2011 and expected to vest	$	34,347		6.86

The weighted-average fair value per share of stock-based awards, including stock options and restricted stock grants, granted during the 2011, 2010 and 2009 was $1.02, $1.11 and $1.09, respectively. During the same periods, the total intrinsic value of stock options exercised was $82,000, $976,000 and $105,000, respectively. The total grant date fair value of stock options vested for 2011, 2010 and 2009 was $2,777,000, $2,666,000 and $1,740,000, respectively.

During 2011, 2010 and 2009, $166,000 $2,011,000 and $76,000, respectively, was received upon the exercise of stock options.

Valuation Assumptions

Stock-based compensation costs are based on the fair value calculated from the Black-Scholes option-pricing model on the date of grant for stock options. The fair value of stock grants is amortized as compensation expense on a straight-line basis over the vesting period of the grants. Stock options granted to employees are service-based and generally vest as described under "—Stock Options" above.

The fair values of stock options granted during the periods presented were measured on the date of grant using the Black-Scholes option-pricing model, with the following assumptions:


	Year Ended December 31,
	2011		2010		2009
Risk-free interest rate		0.9% - 2.4%		1.4% - 3.8%		1.2% - 1.8%
Expected dividend yield		—%		—%		—%
Expected lives		5.2 - 8.9 years		5.3 - 8.0 years		3.6 - 9.1 years
Expected volatility		78.2% - 81.6%		82.5% - 90.3%		92.0% - 94.4%

The risk-free interest rate is estimated using an average of treasury bill interest rates over a historical period commensurate with the expected term of the option that correlates to the prevailing interest rates at the time of grant. The expected dividend yield is zero as the Company has not paid any dividends to date and does not expect to pay dividends in the future. The expected lives are estimated using expected and historical exercise behavior. The expected volatility is estimated using calculated volatility of the Company's common stock over a historical period commensurate with the expected term of the option. The amounts estimated according to the Black-Scholes option pricing model may not be indicative of the actual values realized upon the exercise of these options by the holders.

The Company is required to estimate potential forfeiture of stock grants and adjust compensation cost recorded accordingly. The estimate of forfeitures is adjusted over the requisite service period to the extent that actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures are recognized through a cumulative catch-up in the period of change and impact the amount of stock compensation expense to be recognized in future periods.

Restricted Stock Awards

In June 2011, 2010 and 2009, the Company granted a total of 30,000, 20,000 and 25,000 shares of restricted stock, respectively to members of its board of directors. These shares vest no later than the first anniversary of the date of grant. During 2011, 2010 and 2009, the Company recognized compensation expense related to these shares of $22,000, $26,000 and $17,000, respectively.

In May 2009, the Company granted 100,000 shares of restricted stock to its Chief Business Officer. These shares would have vested upon the achievement of certain performance milestones. No compensation expense related to these shares has been recognized as the achievement of the performance milestones was not accomplished. The restricted stock was cancelled in 2010.

In January 2009, the Company granted 60,000 shares of restricted stock to its Chief Medical Officer. These shares became fully vested in July 2009 and the Company recognized compensation expense related to these shares of $82,000.

In February 2008, the Company granted 333,000 shares of restricted stock to its former Chief Executive Officer. Of these shares, 100,000 vested immediately and the remaining 233,000 were scheduled to vest over a period of four years. In April 2010, the former CEO tendered his resignation at the request of the board of directors. Pursuant to the terms of the related separation agreement, 116,500 shares of his previously granted restricted stock immediately became fully vested at the effective date of the separation agreement. During 2010 and 2009, the Company recognized compensation expense related to these shares of $134,000 and $64,000, respectively.

The following table sets forth restricted stock activity for the years shown:


	For the year ended December 31,
	2011					2010					2009
	Shares			Weighted Average Grant Date Fair Value		Shares			Weighted Average Grant Date Fair Value		Shares			Weighted Average Grant Date Fair Value
Restricted Stock Awards at beginning of year		20,000		$	1.30		300,000		$	1.09		233,000		$	1.09
Granted		30,000			1.41		20,000			1.30		446,000			1.03
Vested		(20,000	)		1.30		(200,000	)		1.09		(379,000	)		1.02
Forfeited or canceled		—			—		(100,000	)		1.10		—			—

Restricted Stock Awards at end of year		30,000		$	1.41		20,000		$	1.30		300,000		$	1.09

The weighted-average grant-date fair value of restricted stock awards is based on the market price of the Company's common stock on the date of grant. The grant-date fair value of the restricted stock awards made during 2011, 2010 and 2009 was $1.41, $1.30 and $1.03, respectively. The total grant-date fair values of restricted stock awards that vested during 2011, 2010 and 2009 were approximately $26,000, $219,000 and $385,000, respectively.

Stock-based Compensation Expense

The amount of stock-based compensation expense recognized in 2011, 2010 and 2009 was $3,129,000, $3,169,000 and $2,374,000, respectively. A summary of the stock based compensation expense recognized in the statement of operations is as follows:


	Year Ended December 31,
	2011		2010		2009
	(in thousands)
Research and development	$	1,279	$	970	$	1,192
General and administrative		1,850		2,199		1,182

Total	$	3,129	$	3,169	$	2,374

As of December 31, 2011, there was $8,011,000 of total unrecognized compensation cost related to non-vested share-based compensation arrangements, including stock options and restricted stock, granted under the Plan. These costs are expected to be recognized over a weighted-average period of 3.1 years.

Pursuant to the terms of the separation agreement between the Company's former Chief Executive Officer and the Company, unvested options previously granted to purchase 1,166,833 shares of common stock and 116,500 shares of restricted stock immediately became fully vested and exercisable at the effective date of the separation agreement. The Company recorded a charge of stock compensation expense of $1,181,000 as a result of the accelerated vesting of these shares in 2010. In addition, the Company recorded a compensation expense of $1,384,000 in 2010 for severance pursuant to the separation agreement.

In 2011, the Company entered into separation agreements and releases with several of its former executives. Pursuant to these agreements, the Company immediately vested certain outstanding existing stock options held by these departing executives and extended the period in which the options can be exercised for a period of up to one year. As a result of these separation agreements and releases, the Company recorded a stock compensation charge of $526,000 and a compensation expense of $1,284,000 in 2011.