10. Equity Incentive Plan

The Anika Therapeutics, Inc. Stock Option and Incentive Plan, as amended, (the “2003 Plan”) provides for grants of nonqualified and incentive stock options, common stock, restricted stock, restricted stock units, and stock appreciation rights (“SAR’s”) to employees, directors, officers and consultants. The 2003 Plan was originally approved by the Board of Directors on April 4, 2003, approved by the Company’s shareholders on June 4, 2003, and reserved 1,500,000 shares of common stock for grant pursuant to its terms.

On May 29, 2009, the Board of Directors approved changes to the 2003 Plan and adopted the Amended and Restated 2003 Stock Option and Incentive Plan (the “Amended 2003 Plan”), to increase the number of shares available to grant by 850,000. The Amended 2003 Plan was approved by the Company’s shareholders on June 5, 2009, and resulted in a total of 2,350,000 shares of common stock being reserved for issuance under the Amended 2003 Plan.

At the 2011 Annual Meeting of Stockholders on June 7, 2011, the shareholders of the Company approved the Anika Therapeutics, Inc. Second Amended and Restated Stock Option and Incentive Plan (the “2003 Plan”), which, among other things, increased the number of shares reserved for issuance under the Company’s predecessor stock option and incentive plan by 800,000 to 3,150,000 shares.

The Company may satisfy the awards upon exercise, or upon fulfillment of the vesting requirements for other equity-based awards, with either newly-issued shares or shares reacquired by the Company. Stock-based awards are granted with an exercise price equal to the market price of the Company’s stock on the date of grant. Awards contain service or performance conditions and generally become exercisable ratably over one to four years.

The 2003 Plan succeeds the Anika Therapeutics, Inc. 1993 Stock Option Plan (“1993 Plan”) which expired according to its terms in 2003. As of December 31, 2012, there were 1,938 shares still outstanding under the 1993 Plan included in the total outstanding options of 1,793,685. There are 763,145 options available for future grant at December 31, 2012.

The Company estimates the fair value of stock options and SAR’s using the Black-Scholes valuation model. Fair value of restricted stock is measured by the grant-date price of the Company’s shares. Key input assumptions used to estimate the fair value of stock options and SAR’s include the exercise price of the award, the expected award term, the expected volatility of the Company’s stock over the option’s expected term, the risk-free interest rate over the award’s expected term, and the Company’s expected annual dividend yield.

The Company uses historical data on exercise of stock options and other factors to estimate the expected term of share-based awards. The Company also evaluates forfeitures periodically and adjusts accordingly. The expected volatility assumption is based on the historical volatility of the Company’s common stock. The risk-free interest rate assumption is based on U.S. Treasury interest rates at the time of grant.

The fair value of each stock option and SAR award during 2012, 2011, and 2010 was estimated on the grant date using the Black-Scholes option-pricing model with the following assumptions:

	December 31,
	2012	2011	2010
Risk free interest rate	0.63% to 0.64%	1.1% to 1.51%	1.11% to 1.88%
Expected volatility	57.60%	57.60%	57.60%
Expected lives (years)	4	4	4
Expected dividend yield	0.00%	0.00%	0.00%

The Company recorded $1,151,199, $1,190,697 and $1,102,617 of share-based compensation expense for the years ended December 31, 2012, 2011 and 2010, respectively, for stock options, SAR’s and restricted stock awards. The Company presents the expenses related to stock-based compensation awards in the same expense line items as cash compensation paid to each of its employees.

Combined stock options and SAR’s activity under our plans is summarized as follows for the years ended December 31, 2012 and, 2011 respectively:

	2012					2011
				Weighted					Weighted
				Average					Average
				Exercise					Exercise
	Number of			Price Per		Number of			Price Per
	Shares			Share		Shares			Share
Options and SAR's outstanding at beginning of year		2,108,003		$	7.26		1,625,253		$	6.92
Granted		204,000		$	12.06		679,000		$	6.98
Cancelled		(212,749	)	$	6.58		(74,187	)	$	6.41
Expired		(7,714	)	$	1.68		(875	)	$	3.04
Exercised		(297,855	)	$	4.74		(121,188	)	$	1.60
Options and SAR's outstanding at end of year		1,793,685		$	8.30		2,108,003		$	7.26

Of the 1,793,685 options and SAR’s outstanding at December 31, 2012, approximately 1,763,000 are vested or are expected to vest with a weighted-average exercise price of approximately $8.56 as well as an aggregate intrinsic value of approximately $4 million related to these awards. The weighted average remaining contractual term of the vested and expected to vest options and SAR’s was 4.63 years as of December 31, 2012.

As of December 31, 2012, total unrecognized compensation costs related to non-vested options and SAR’s was approximately $1,826,000 and is expected to be recognized over a weighted average period of 2.4 years.

There were 247,934 incentive stock options (ISOs) exercisable at December 31, 2012 with a weighted-average exercise price of $8.71 and a weighted-average remaining contractual term of 4.14 years for these awards.

There were 222,002 non-qualified stock options exercisable at December 31, 2012 with a weighted-average exercise price of $8.94 and a weighted-average remaining contractual term of 3.13 years.

There were 570,460 SAR’s exercisable at December 31, 2012 with a weighted-average exercise price of $8.35 and a weighted-average remaining contractual term of 5.43 years for these awards.

The aggregate intrinsic value of stock options and SAR’s fully vested at December 31, 2012 and 2011 was $2,115,267 and $2,390,591 respectively. The aggregate intrinsic value of stock options and SAR’s outstanding at December 31, 2012 and, 2011 was $4,074,471 and $6,107,869, respectively.

The total intrinsic value of options and SAR’s exercised was $2,214,516 and, $679,401 for the years ended December 31, 2012 and 2011, respectively.

The total fair value of options and SAR’s vested during the years ended December 31, 2012 and 2011 was $997,194 and $774,648, respectively.

The Company received $388,676 and, $160,470 for exercises of stock options during the years ended December 31, 2012 and 2011, respectively.

The restricted stock activity for the years ended December 31, 2012 and 2011 is as follows:

	2012					2011
				Weighted					Weighted
				Average					Average
	Number of			Grantd Date		Number of			Grantd Date
	Shares			Fair Value		Shares			Fair Value
Nonvested at Beginning of year		59,196		$	5.71		77,085		$	5.48
Granted		31,312		$	9.10		29,978		$	6.98
Cancelled		(25	)	$	3.05		(850	)	$	3.05
Expired		-		$	-		-		$	-
Vested/Released		(21,527	)	$	5.08		(47,017	)	$	6.13
Nonvested at end of year		68,956		$	6.87		59,196		$	5.71

The total fair value of restricted stock and restricted stock units vested during the year ended December 31, 2012 was $203,485.