Stock-Based Compensation

9 Months Ended

Jun. 30, 2011

Stock-Based Compensation

Stock-Based Compensation

4.  Stock-Based Compensation

Stock-based compensation expense is measured at the grant date, based on the fair value of the award, and is recognized as an expense over the employee’s requisite service period (generally the vesting period of the equity award).

The following table presents stock-based employee compensation expense included in the Company’s condensed consolidated statements of operations (in thousands):

	Three months ended June 30,				Nine months ended June 30,
	2011		2010		2011		2010
Cost of revenues	$	31	$	38	$	102	$	115
Research and development	25		40		87		129
Selling and marketing	76		78		229		247
General and administrative	82		87		260		346
Total stock-based compensation expense	$	214	$	243	$	678	$	837

The Company estimates the fair value of stock options using the Black-Scholes valuation model.  This valuation model takes into account the exercise price of the award, as well as a variety of significant assumptions.  These assumptions include the expected term, the expected volatility of the Company’s common stock over the expected term, the risk-free interest rate over the expected term, and the Company’s expected annual dividend yield.  The Company believes that the valuation technique and the approach utilized to develop the underlying assumptions are appropriate in calculating the fair values of the Company’s stock options granted during the three and nine month periods ended June 30, 2011 and 2010.  Estimates of fair value are not intended to predict the value ultimately realized by persons who receive equity awards.  In determining the amount of expense to be recorded, judgment is also required to estimate forfeitures of the awards based on the probability of employees completing the required service period.  Historical forfeitures are used as a starting point for developing the estimate of future forfeitures.

Assumptions used to determine the fair value of options granted during the three and nine months ended June 30, 2011 and 2010, using the Black-Scholes valuation model, were:

	Three months ended June 30,		Nine months ended June 30,
	2011	2010	2011	2010
Expected term (1)	3.75 years	3.75 years	3.75 to 6.50 years	3.75 to 6.50 years
Expected volatility factor (2)	76.15%	75.31%	69.80% to 77.71%	71.56% to 75.31%
Risk-free interest rate (3)	1.12% to 1.37%	1.58% to 1.86%	0.76% to 2.42%	1.45% to 2.97%
Expected annual dividend yield	—	—	—	—

(1)	The expected term for each grant was determined based on analysis of the Company’s historical exercise and post-vesting cancellation activity.
(2)	The expected volatility for each grant was estimated based on a weighted average of the historical volatility of the Company’s common stock.
(3)	The risk-free interest rate for each grant was based on the U.S. Treasury yield curve in effect at the time of grant for a period equal to the expected term of the stock option.

A summary of the Company’s stock option activity for the nine months ended June 30, 2011 is as follows:

	Nine months ended June 30, 2011
	Number of Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)
Outstanding at September 30, 2010	7,262,112		$	1.95
Granted	711,000		$	1.59
Exercised	(111,638	)	$	0.90
Forfeited	(41,598	)	$	1.27
Expired	(95,657	)	$	2.61
Outstanding at June 30, 2011	7,724,219		$	1.93	5.59
Exercisable at June 30, 2011	6,240,398		$	2.08	4.94

All stock options granted during the nine months ended June 30, 2011 were granted with exercise prices equal to the fair market value of the Company’s common stock on the grant date and had a weighted average grant date fair value of $0.97.

At June 30, 2011, unrecognized compensation expense related to non-vested stock options was $943,000, which is expected to be recognized over a weighted average vesting period of 2.12 years.