11. STOCKHOLDER’S EQUITY (DEFICIT) AND STOCK-BASED COMPENSATION

Equity Incentive Plan

The Company's 1995 Equity Incentive Plan (the Equity Plan), as amended, is an equity plan under which equity awards, including awards of restricted stock, restricted stock units and incentive and nonqualified stock options to purchase shares of common stock may be granted to employees, consultants and directors of the Company by action of the Compensation Committee of the Board of Directors. Options are generally granted at the current fair market value on the date of grant, generally vest ratably over a 48-month period, and expire within ten years from date of grant. Restricted stock unit are generally granted at the current fair market value on the date of grant, generally vest over a four year period in equal installments on each anniversary of the grant date. The Equity Plan is intended to attract and retain employees and to provide an incentive for employees, consultants and directors to assist the Company to achieve long-range performance goals and to enable them to participate in the long-term growth of the Company.

At the Annual Meeting of Stockholders held in May 2012 (the Annual Meeting), the Company’s shareholders approved a stock option exchange program for employees, executive officers and non-employee directors. Under this option exchange program, outstanding options to purchase an aggregate of 4,192,310 shares of the Company’s common stock were exchanged for new options to purchase an aggregate of 2,473,596 shares of the Company’s common stock at an exercise price equal to $2.06 per share, which was the closing price of the Company’s common stock on the grant date of June 20, 2012. All new options issued in the option exchange program are subject to a new, extended vesting schedule, the terms of which differ depending on the holder’s status as an executive, director or non-executive employee. The new options have a term equal to the greater of (i) the term of the original options for which they were exchanged, or (ii) five years from date of grant. The new options had a fair value approximately equal to the fair value of the surrendered options, based on a Black-Scholes option pricing model applied immediately prior to commencement of the exchange program. Accordingly, approximately $25,000 and $28,000 of expense was recorded during the three and nine months ended September 30, 2012 related to the modification of the exchanged options.

Also at the Annual Meeting, the Company’s shareholders approved an amendment to the Equity Plan to increase the number of shares of common stock available for issuance under the plan by 5,000,000 shares less the net number of shares, if any, returned to the Equity Plan for issuance following the option exchange program. Accordingly, 3,281,286 additional shares of common stock, constituting the approved 5,000,000 share increase net of the 1,718,714 shares that were returned to the Equity Plan as a result of the option exchange program, became available for issuance under the plan.

At September 30, 2012, a total of 6,137,673 shares were available for future grants under the Equity Plan.

Employee Stock Purchase Plan

The Company's Purchase Plan allows employees to purchase shares of the Company's common stock at a discount from fair market value. Under this Plan, eligible employees may purchase shares during six-month offering periods commencing on June 1 and December 1 of each year at a price per share of 85% of the lower of the fair market value price per share on the first or last day of each six-month offering period. Participating employees may elect to have up to 10% of their base pay withheld and applied toward the purchase of such shares, subject to the limitation of 875 shares per participant per quarter. The rights of participating employees under the Purchase Plan terminate upon voluntary withdrawal from the Purchase Plan at any time or upon termination of employment. The compensation expense in connection with the Plan was approximately $15,000 and $32,000 for the three and nine months ended September 30, 2012, respectively, and $8,000 and $32,000, respectively, for the three and nine months ended September 30, 2011. There were 48,748 and 87,188 shares purchased under the Plan during the nine months ended September 30, 2012 and 2011, respectively. At September 30, 2012, a total of 408,165 shares were reserved and available for issuance under this Plan.

Stock-Based Compensation Expense

The Company measures compensation cost for all stock awards at fair value on date of grant and recognition of compensation over the service period for awards expected to vest. The fair value of stock options was determined using the Black-Scholes valuation model. Such value is recognized as expense over the service period, net of estimated forfeitures and adjusted for actual forfeitures. The estimation of stock options that will ultimately vest requires significant judgment. The Company considers many factors when estimating expected forfeitures, including historical experience. Actual results and future changes in estimates may differ substantially from the Company's current estimates.

The following table reflects stock compensation expense recorded, net of amounts capitalized into inventory, during the three and nine months ended September 30, 2012 and 2011 (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2012		2011		2012		2011
Compensation expense related to:
Equity Incentive Plan	$	733	$	883	$	2,744	$	3,078
Employee Stock Purchase Plan		15		8		32		32
	$	748	$	891	$	2,776	$	3,110

Stock-based compensation expense charged to:
Research and development	$	198	$	273	$	576	$	896

Selling, general and administrative	$	550	$	618	$	2,145	$	2,214

Restructuring charges	$	—	$	—	$	55	$	—

Stock-based compensation expense capitalized into inventory was $9,000 and $15,000 for the three and nine months ended September 30, 2012, respectively, and $18,000 and $25,000 for the three and nine months ended September 30, 2011, respectively. Capitalized stock-based compensation is recognized into cost of product sales when the related product is sold.

Stock-based compensation expense for the three and nine months ending September 30, 2012 included $46,000 and $428,000, respectively, related to the modification of certain stock options.