NOTE 13.

SHARE BASED COMPENSATION

The Company's share-based compensation plan, the 2006 Equity Incentive Plan (“Incentive Plan”), is administered by the compensation committee of the Board of Directors (“Board”), which selects persons to receive awards and determines the number of shares subject to each award and the terms, conditions, performance measures and other provisions of the award.

We account for share-based compensation under FASB ASC Topic 718, Stock Compensation, which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees, consultants, and directors based on estimated fair values of the award on the grant date. We use the Black-Scholes option-pricing model to estimate the fair value of share-based awards with the following weighted average assumptions for the three months ended June 30:

	2011 (4)		2010
Incentive Stock Options
Expected volatility (1)		---		86.9	%
Risk-free interest rate % (2)		---		2.23	%
Expected term (in years)		---		6.0
Dividend yield (3)		---		0.0	%
Forfeiture rate		---		0.0	%

Nonstatutory Stock Options
Expected volatility (1)		---		86.9	%
Risk-free interest rate % (2)		---		2.50	%
Expected term (in years)		---		7.2
Dividend yield (3)		---		0.0	%
Forfeiture rate		---		0.0	%

(1)	Expected volatility assumption was based upon a combination of historical stock price volatility measured on a daily basis and an estimate of expected future stock price volatility
(2)	Risk-free interest rate assumption is based upon U.S. Treasury bond interest rates appropriate for the term of the stock options.
(3)	The Company does not currently intend to pay cash dividends, thus has assumed a 0% dividend yield.
(4)	The Company did not award any shared-based compensation for the three months ended June 30, 2011.

Our Board granted the following incentive stock option awards to executives or employees and nonstatutory stock option awards to directors or non-employees for the three and six months ended June 30:

	Three Months Ended June 30,				Six Months Ended June 30,
	2011		2010		2011		2010
Incentive Stock Options
Quantity		---		5,333		1,334		6,667
Weighted average fair value per share		---	$	1.70	$	1.15	$	1.77
Fair value		---	$	9,070	$	1,534	$	11,819

Nonstatutory Stock Options
Quantity		---		120,000		---		120,000
Weighted average fair value per share		---	$	1.91		---	$	1.91
Fair value		---	$	229,711		---	$	229,711

Stock Options (Incentive and Nonstatutory)

The following table summarizes share-based compensation related to stock options for the three and six months ended June 30:

	Three Months Ended June 30,				Six Months Ended June 30,
	2011		2010		2011		2010
Research and development	$	13,296	$	31,028	$	26,446	$	54,503
Selling, general and administrative		21,693		12,535		45,330		122,118
Total share-based compensation expense	$	34,989	$	43,563	$	71,776	$	176,621

At June 30, 2011, the balance of unearned share-based compensation to be expensed in future periods related to unvested stock option awards, as adjusted for expected forfeitures, is approximately $177,576. The period over which the unearned share-based compensation is expected to be recognized is approximately three years.

The following table summarizes the stock options outstanding and the number of shares of common stock subject to exercise as of June 30, 2011 and the changes therein during the six months then ended:

	Stock Options			Weighted Average Exercise Price per Share
Outstanding as of December 31, 2010		290,411		$	16.76
Granted		1,334			1.50
Forfeited/cancelled		(4,000	)		2.40
Exercised		---			---
Outstanding as of June 30, 2011		287,745		$	16.89

The following table presents the stock option grants outstanding and exercisable as of June 30, 2011:

Options Outstanding						Options Exercisable
Stock Options Outstanding		Weighted Average Exercise Price per Share		Weighted Average Remaining Contractual Life in Years		Stock Options Exercisable		Weighted Average Exercise Price per Share
	180,005	$	5.94		7.3		117,865	$	7.75
	37,669		23.73		6.0		37,669		23.73
	58,737		36.57		3.2		55,771		36.68
	11,334		66.04		5.7		11,334		66.04
	287,745	$	16.89		6.3		222,639	$	20.67

Restricted Stock Awards

Restricted stock awards, which typically vest over a period of two to five years, are issued to certain key employees and are subject to forfeiture until the end of an established restriction period. We utilize the market price on the date of grant as the fair market value of restricted stock awards and expense the fair value on a straight-line basis over the vesting period.

The following table summarizes share-based compensation related to restricted stock awards for the three months and six months ended June 30:

	Three Months Ended June 30,				Six Months Ended June 30,
	2011		2010		2011		2010
Research and development	$	3,701	$	9,585	$	8,720	$	17,194
Selling, general and administrative		2,623		34,299		6,178		47,664
Total share-based compensation expense	$	6,324	$	43,884	$	14,898	$	64,858

At June 30, 2011, the balance of unearned share-based compensation to be expensed in future periods related to restricted stock awards, as adjusted for expected forfeitures, is approximately $25,092. The period over which the unearned share-based compensation related to restricted stock awards is expected to be recognized is approximately two years.

The following table summarizes the non-vested restricted stock awards outstanding and the number of shares of common stock subject to potential issue as of June 30, 2010 and the changes therein during the three months then ended:

	Restricted stock			Weighted Average Grant Date Fair Value
Outstanding as of December 31, 2010		6,336		$	14.23
Shares granted		---			---
Shares forfeited/cancelled		---			---
Shares exercised/issued		(5,240	)		8.53
Outstanding as of June 30, 2011		1,096		$	41.47

Summary of Plans

2006 Equity Incentive Plan

In March 2006, our Board adopted and our stockholders approved our Incentive Plan, which initially provided for the issuance of up to 133,333 shares of our Common Stock pursuant to stock option and other equity awards. At the annual meetings of the stockholders held on May 8, 2007, December 17, 2009, and on June 15, 2010, our stockholders approved amendments to the Incentive Plan to increase the total number of shares of Common Stock issuable under the Incentive Plan pursuant to stock options and other equity awards by 266,667 shares, 200,000 shares, and 200,000 shares, respectively.

In December 2006, we began issuing stock options to employees, consultants, and directors. The stock options issued generally vest over a period of one to four years and have a maximum contractual term of ten years. In January 2007, we began issuing restricted stock awards to our employees. Restricted stock awards generally vest over a period of six months to five years after the date of grant. Prior to vesting, restricted stock awards do not have dividend equivalent rights, do not have voting rights and the shares underlying the restricted stock awards are not considered issued and outstanding. Shares of common stock are issued on the date the restricted stock awards vest.

As of June 30, 2011, we had granted options to purchase 408,667 shares of Common Stock since the inception of the Incentive Plan, of which 287,745 were outstanding at a weighted average exercise price of $16.89 per share and we had granted awards for 68,616 shares of restricted stock since the inception of the Incentive Plan, of which 1,096 were outstanding. As of June 30, 2011, there were 442,712 shares that remained available for future grant under our Incentive Plan.