STOCK-BASED COMPENSATION

3 Months Ended

Mar. 31, 2012

STOCK-BASED COMPENSATION

STOCK-BASED COMPENSATION

NOTE 2. STOCK-BASED COMPENSATION

        Stock Option Plans.    We have authorized 20,500,976 shares of common stock for issuance following the grant of incentive stock options or nonstatutory stock options to employees, directors, and consultants under our stock option plans. The number of shares to be purchased, their price, and the terms of payment are determined by our Board of Directors, provided that the exercise price for incentive stock options cannot be less than the fair market value on the date of grant. The options granted generally expire ten years after the date of grant and become exercisable at such times and under such conditions as determined by the Board of Directors (generally over a four or five year period). Options that have performance-based vesting criteria become exercisable in accordance with the milestones determined by the Board of Directors.

        Employee Stock Purchase Plan.    We also have an employee stock purchase plan ("ESPP") that allows eligible employees to purchase common stock at a price per share equal to 85% of the lower of the fair market value of the common stock at the beginning or end of each six month period during the term of the ESPP. The current offering period began November 15, 2011 and is scheduled to end on May 14, 2012.

        We recognized $765,000 and $711,000, respectively, in stock-based compensation expense for the three months ended March 31, 2012 and 2011. These amounts have been recorded in research and development expenses or general and administrative expenses, based on the home department of our employees.

        The fair value of each stock award has been estimated on the grant date using the Black-Scholes option-pricing model based on the weighted-average assumptions noted in the following table:

	Three months ended March 31,
	2012			2011
Risk-free interest rate		1.39	%		2.59	%
Dividend yield		—			—
Expected volatility		75.10	%		57.76	%
Expected life (in years)		6.54			6.23

        We compute expected volatility using a blend of historical volatility and implied volatility of our common stock based on the period of time corresponding to the expected life of the stock options. We do not rely exclusively on implied volatility because options on our stock with remaining terms of greater than one year are not regularly traded in the market. The expected life of stock options granted is based exclusively on historical data and represents the weighted average period of time that stock options granted are expected to be outstanding. The expected life is applied to one group as a whole as we do not expect substantially different exercise or post-vesting termination behavior among our employee and director population. The risk-free interest rate is based on the US Treasury yield curve in effect at the time of grant commensurate with the expected life assumption. The dividend yield is zero as we do not expect to pay any dividends in the foreseeable future. We currently estimate when and if performance-based options will be earned. If the awards are not considered probable of achievement, no amount of stock-based compensation is recognized. If we consider the award to be probable of vesting, expense is recorded over the estimated service period.

        We are using the straight-line attribution method to recognize stock-based compensation expense. The amount of stock-based compensation recognized during a period is based on the value of the portion of the awards that are ultimately expected to vest. We estimate forfeiture rates at the time of grant and revise them, if necessary, in subsequent periods if actual forfeitures differ from those estimates. We used estimated forfeiture rates of 7.47% and 7.89% for the three month periods ended March 31, 2012 and 2011, respectively. The term "forfeitures" is distinct from "cancellations" or "expirations" and represents only the unvested portion of a surrendered option. The forfeiture rate is re-evaluated annually and is adjusted as necessary based upon historical data. Ultimately, the actual expense recognized over the vesting period will only be for those shares that vest.

        A summary of the Company's stock options as of March 31, 2012 and activity during the three months then ended is presented below:

	Options Outstanding			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value
Balance at January 1, 2012		14,366,623		$	3.83
Granted		785,000			1.89
Exercised		(55,665	)		1.13
Forfeited		(31,393	)		3.35
Expired		(168,727	)		3.90
Balance at March 31, 2012		14,895,838		$	3.74		5.86	$	2,136,654
Vested or expected to vest at March 31, 2012		14,290,907		$	3.74		5.80	$	2,096,215
Exercisable at March 31, 2012		10,082,478		$	3.83		5.12	$	1,601,368

        The weighted-average grant-date fair value of options granted during the three months ended March 31, 2012 was $1.28 per option. The total intrinsic value of options exercised (i.e. the difference between the market price at exercise and the price paid to exercise the options) during the three months ended March 31, 2012 was $46,000 and the total amount of cash received from exercise of these options was $62,000.

        As of March 31, 2012, there was $4,185,000 of total unrecognized compensation expense related to unvested stock-based awards that vest based upon service conditions or vest based upon performance conditions and are probable of vesting. This expense is expected to be recognized over a weighted average period of 2.62 years.