15. STOCK-BASED COMPENSATION

The following table summarizes stock-based compensation expense recorded for the periods presented and its allocation within the condensed consolidated statements of operations (in thousands):

	Three Months Ended				Nine Months Ended
	September 30, 2014		September 30, 2013		September 30, 2014		September 30, 2013
Cost of sales - product	$	668	$	686	$	1,828	$	2,252
Cost of sales - service		1,102		1,479		3,164		4,600
Stock-based compensation expense included in cost of sales		1,770		2,165		4,992		6,852

Sales and marketing		4,673		5,889		10,397		19,742
Research and development		3,203		3,669		7,304		12,578
General and administrative		5,122		5,479		11,485		14,128
Stock-based compensation expense included in operating expenses		12,998		15,037		29,186		46,448
Stock-based compensation expense related to employee equity awards and employee stock purchases		14,768		17,202		34,178		53,300
Tax benefit		3,016		7,960		6,778		24,663
Stock-based compensation expense related to employee equity awards and employee stock purchases, net of tax	$	11,752	$	9,242	$	27,400	$	28,637

Stock-based compensation expense is not allocated to segments because it is centrally managed at the corporate level.

Stock Options

There were no stock options granted in the nine months ended September 30, 2014 and 2013.

Performance Shares and Restricted Stock Units

During the nine months ended September 30, 2014 and 2013, the Company granted 659,416 and 1,373,329, respectively, of performance shares to certain employees and executives, at a weighted average fair value of $13.81 and $8.83 per share, respectively. The 2014 and 2013 grants are generally divided evenly over three annual performance periods commencing with calendar year 2014 and 2013, respectively.

During the nine months ended September 30, 2014 and 2013, the Company granted 2,847,979 and 4,571,571, respectively, of restricted stock units at a weighted average fair value of $12.96 and $10.12 per share, respectively.

During the nine months ended September 30, 2014 and 2013, the Company granted non-employee directors 140,000 and 100,000, respectively, of restricted stock units at a weighted average fair value of $12.87 and $11.14 per share, respectively.

Employee Stock Purchase Plan

During the nine months ended September 30, 2014 and 2013, 2,944,069 and 2,904,287 shares were purchased under the Company’s employee stock purchase plan (“ESPP”), respectively. As of September 30, 2014, there were 11,315,067 shares available to be issued under ESPP.

Valuation Assumptions

For purchase rights granted pursuant to the ESPP, the estimated fair value per share of employee stock purchase rights for the two-year offering period commencing on August 1, 2014 ranged from $2.80 to $4.10, compared to the estimated fair value per share from $2.60 to $4.06 for the two-year offering period commencing on August 1, 2013. The estimated fair value per share of employee stock purchase rights for the two-year offering period commencing on February 3, 2014 ranged from $2.82 to $4.48, compared to the estimated fair value per share from $2.93 to $4.57 for the two-year offering period commencing on February 1, 2013.

The fair value of each employee stock purchase right grant is estimated on the date of grant using the Black-Scholes option valuation model and is recognized as expense using the graded vesting method using the following assumptions:

	Three Months Ended		Nine Months Ended
	September 30, 2014	September 30, 2013	September 30, 2014		September 30, 2013
Expected volatility	26.47-32.18%	42.40-48.89%	26.47-42.11%		42.40-50.55%
Risk-free interest rate	0.05-0.47%	0.08-0.35%	0.05-0.47%		0.08-0.35%
Expected dividends	0.0%	0.0%		0.0%		0.0%
Expected life (yrs)	0.5-2.0	0.5-2.0	0.5-2.0		0.5-2.0

The Company computed its expected volatility assumption based on blended volatility (50% historical volatility and 50% implied volatility). The selection of the blended volatility assumption was based upon the Company’s assessment that blended volatility is more representative of the Company’s future stock price trends as it weighs in the longer term historical volatility with the near term future implied volatility.

The risk-free interest rate assumption is based upon observed interest rates appropriate for the expected life of the Company’s employee stock purchases.

The dividend yield assumption is based on the Company’s history of not paying dividends and future expectation of dividend payouts.

The expected life of employee stock purchase rights represents the contractual terms of the underlying program.

During the three months ended March 31, 2014, the Company performed its annual review of assumptions, which resulted in an increase in the forfeiture rate. The effect of the change in the forfeiture rate decreased stock-based compensation expense by approximately $1.8 million which decreased the Company’s net loss by approximately $1.4 million or $0.01 per share in the three months ended March 31, 2014. There was no material impact in the three months ended June 30, 2014 and September 30, 2014. Additionally, during the three months ended March 31, 2014, the Company recorded a benefit of $2.1 million related to actual forfeitures of awards granted to former officers, and there was no such benefit recorded in the three months ended June 30, 2014 and September 30, 2014.