Note 11. Employee Benefit Plans and Stock-based Compensation

Stock Option Plans and Equity Incentive Plans

In July 1997, our board of directors approved the 1997 Stock Option Plan (“1997 Plan”), which provides for the grant of incentive and non-qualified stock options to our employees, consultants and directors. Under the 1997 Plan, 5,423,583 shares of common stock have been authorized for issuance. Options granted under the 1997 Plan are generally for periods not to exceed ten years (five years if the option is granted to a 10% stockholder) and are granted at the fair market value of the stock at the date of grant as determined by the board of directors. Options granted under the 1997 Plan generally vest 25% at the end of one year and 2.1% each month thereafter, with full vesting after four years.

In May 2007, our shareholders approved our 2007 Equity Incentive Plan (the “2007 Plan”). The 2007 Plan is a restatement of the 1997 Plan which was scheduled to expire in 2007. The share reserve of the 1997 Plan became the reserve of the 2007 Plan, together with 1,300,000 additional shares approved for issuance under the 2007 Plan. As of December 31, 2007, approximately 2.9 million shares remained available for grant under the 2007 Plan. Awards may be made under the 2007 Plan of stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units, deferred compensation awards and other stock-based awards. Stock options and stock appreciation rights awarded under the 2007 Plan may not be repriced without stockholder approval. Stock options and stock appreciation rights may not be granted below fair market value. Stock options or stock appreciation rights generally shall not be fully vested over a period of less than three years from the date of grant and cannot be exercised more than 10 years from the date of grant. Restricted stock, restricted stock units, and performance awards generally shall not vest faster than over a three-year period (or a twelve-month period if vesting is based on a performance measure). In December 2008, the 2007 Plan was amended to comply with the applicable requirements under Section 409A of the Internal Revenue Code. As of December 31, 2011, approximately 919,000 shares were available for grant under the 2007 Plan.

The following summarizes our stock option activity under the 1997 Plan and the 2007 Plan, and the related weighted average exercise price within each category for each of the years ended December 31, 2009, 2010, and 2011 (in thousands, except per share data):

Stock Options	Number of Options Outstanding			Weighted- average Exercise Price		Weighted- average Remaining Contractual Life		Aggregate Intrinsic Value
						(in years)
Balance as of December 31, 2008		2,764		$	2.74		6.61	$	92
Granted		789			1.87
Exercised		(247	)		1.42
Canceled		(426	)		3.73
Balance as of December 31, 2009		2,880			2.46		5.70		3,850
Granted		399			5.93
Exercised		(876	)		1.71
Canceled		(123	)		7.26
Balance as of December 31, 2010		2,280			3.10		6.40		17,030
Granted		367			4.79
Exercised		(251	)		2.54
Canceled		(16	)		27.98
Balance as of December 31, 2011		2,380		$	3.25		6.25	$	3,456
Options vested and expected to vest as of December 31, 2011		2,322		$	3.22		6.18	$	3,426
Options exercisable as of December 31, 2011		1,412		$	2.72		4.56	$	2,646

The options outstanding and exercisable as of December 31, 2011 were in the following exercise price ranges (in thousands, except per share data):

	Options Outstanding as of December 31, 2011						Options Vested and Exercisable as of December 31, 2011
					Weighted-average
Range of				Weighted-average		Remaining				Weighted-Average
Exercise Price		Shares		Exercise Price		Contractual Life		Shares		Exercise Price
$1.18 - $1.38		407	$	1.31		2.48		407	$	1.31
$1.40 - $1.40		1	$	1.40		3.20		1	$	1.40
$1.59 - $1.59		328	$	1.59		7.29		194	$	1.59
$1.88 - $1.91		8	$	1.90		2.74		8	$	1.90
$2.04 - $2.04		442	$	2.04		7.82		224	$	2.04
$2.19 - $3.11		260	$	2.36		1.10		260	$	2.36
$3.14 - $4.09		18	$	3.34		3.32		18	$	3.34
$4.79 - $4.79		366	$	4.79		9.82		0	$	0.00
$4.81 - $5.09		65	$	4.84		4.99		64	$	4.84
$5.83 - $9.69		485	$	6.22		7.68		236	$	6.51
		2,380	$	3.25		6.25		1,412	$	2.72

The total intrinsic value of options exercised for the years ended December 31, 2011, 2010 and 2009 were $1.6 million, $4.3 million and $142,000, respectively. Total fair value of stock options vested during the years ended December 31, 2011, 2010 and 2009 was $705,000, $426,000 and $699,000, respectively. Cash received from option exercises for the years ended December 31, 2011, 2010 and 2009 were $637,000, $1.5 million, and $351,000, respectively.

As of December 31, 2011, the total unamortized stock-based compensation cost related to unvested stock options granted to employees under our stock option plans was approximately $1.9 million, net of estimated forfeitures of $136,000. This cost is being amortized on a straight-line basis over a weighted-average period of approximately 2.6 years and will be adjusted for subsequent changes in estimated forfeitures. We did not capitalize any stock-based compensation to inventory as of December 31, 2011 and 2010, as the amounts are not significant.

Restricted stock awards

A summary of activity related to restricted stock awards for the years ended December 31, 2009, 2010 and 2011 is presented below:

Stock Awards	Shares			Weighted-Average Grant Date Fair Value
Non-vested as of December 31, 2008		78,544		$	2.12
Granted		120,908			0.88
Vested		(28,792	)		2.32
Non-vested as of December 31, 2009		170,660			1.21
Granted		121,237			5.29
Vested		(69,092	)		1.48
Forfeited		(4,400	)		5.83
Non-vested as of December 31, 2010		218,405			3.30
Granted		97,986			5.21
Vested		(93,264	)		2.51
Non-vested as of December 31, 2011		223,127		$	4.47

Total fair value of stock awards vested during the years ended December 31, 2011, 2010 and 2009 was $234,000, $102,000 and $67,000, respectively. As of December 31, 2011, we had $854,000 of unrecognized compensation expense, net of forfeitures, related to restricted stock awards, which will be recognized over the weighted average period of 2.5 years.

Stock-based Compensation

We recorded $896,000, $655,000 and $766,000 of stock-based compensation in our consolidated statements of operations for the years ended December 31, 2011, 2010 and 2009, respectively. We utilized the Black-Scholes valuation model for estimating the fair value of the stock compensation granted both before and after the adoption of ASC 718. The following table summarizes compensation costs related to our stock-based compensation awards (in thousands, except per share data):

	Years Ended December 31,
	2011			2010			2009
Stock-based compensation in the form of employee stock options and restricted stock, included in:
Cost of revenue	$	84		$	36		$	39
Selling, general and administrative		766			562			672
Research and development		46			57			55
Total stock-based compensation		896			655			766
Tax effect on stock-based compensation		-			-			-
Net effect on net income/loss	$	896		$	655		$	766
Shares used in computing basic net income per share		31,872			31,008			30,500
Shares used in computing diluted net income per share		33,061			32,512			30,500
Effect on basic net income/loss per share	$	(0.03	)	$	(0.02	)	$	(0.03	)
Effect on diluted net income/loss per share	$	(0.03	)	$	(0.02	)	$	(0.03	)

We estimate the fair value of stock options using a Black-Scholes valuation model. The weighted-average grant date fair value of our stock options granted to employees during 2011, 2010, and 2009 was $2.65, $3.11, and $0.99 per share, respectively. The fair value of options granted was estimated at the date of grant using the following weighted-average assumptions:

	Years Ended December 31,
	2011			2010			2009
Risk-free interest rate		0.80	%		1.00	%		2.04	%
Expected life (in years)		4.0			4.0			4.0
Dividend yield		-			-			-
Volatility		74.99	%		69.84	%		69.0	%
Estimated forfeitures		4.4	%		7.2	%		7.5	%

The dividend yield of zero is based on the fact that we have never paid cash dividends and have no present intention to pay cash dividends. Expected volatility is based on the historical volatility of our Company's common stock. The risk-free interest rates are taken from the Daily Federal Yield Curve Rates as of the grant dates as published by the Federal Reserve and represent the yields on actively traded Treasury securities for terms equal to the expected term of the options. The expected term calculation for stock options is based on the observed historical option exercise behavior and post-vesting forfeitures of options by our employees.

ASC 718, Stock Compensation, requires us to estimate forfeiture rates at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. We use historical forfeitures to estimate its future forfeiture rates. We decreased our forfeiture rate for stock options from 7.2% in 2010 to 4.4% in 2011 due to lower historical cancellation rates, which did not materially impact stock compensation expense. The forfeiture rate for restricted stock awards remained 0% for both 2011 and 2010.

Retirement Savings Plan

We have a 401(k) Savings Plan (“Savings Plan”) which qualifies as a thrift plan under Section 401(k) of the Internal Revenue Code. All full-time U.S. employees are eligible to participate in the Savings Plan after 90 days from the date of hire. Employees may elect to reduce their current compensation by up to the statutory prescribed annual limit and have the amount of such reduction contributed to the 401(k) Plan. We provide matching to employee contributions up to 4% of the employees' base pay if employees contribute at least 6% of their base pay. If the contribution rate is less than 6% of the base pay, the matching percentage is prorated. Our consolidated joint ventures in China also contribute to the retirement saving plans for the full-time employees in China. Our contributions to the retirement savings plans were $610,000, $485,000, and $453,000 for the years ended December 31, 2011, 2010 and 2009, respectively.