Equity Incentive Plan

The Company’s Equity Incentive Plan (the “plan”) provides for the granting of stock options and restricted stock to employees, officers and non-employee directors at the discretion of the Board or a committee of the Board. The purpose of the plan is to recognize past services rendered and to provide additional incentive in furthering the continued success of the Company.

The Company grants to certain employees and officers stock options and restricted stock unit awards. Stock options granted under the plan expire between the fifth and tenth anniversary of the date of grant and may vest on the third anniversary from the date of grant or may vest twenty-five percent per year over four years. Unexercised stock options may expire up to 90 days after an employee's termination for options granted under the plan. Restricted stock units granted under the plan vest twenty-five percent per year over four years. Under the plan all unvested restricted stock grants are forfeited to the issuer on the date of termination.

The Company grants to non-employee directors stock options and restricted stock awards. Stock options granted under the plan expire on the fifth anniversary from the date of grant and vest 100% on the day preceding the Company’s annual meeting of Shareholders. Restricted stock awards granted under the plan vest 100% on the day preceding the Company’s annual meeting of Shareholders. In the event a non-employee director ceases to be a director for the Company before the shares are fully vested, the unvested restricted shares will be forfeited to the Company.

As of June 30, 2012, there were 2,721,191 options to purchase shares of common stock and 273,080 shares of restricted stock and restricted stock units outstanding under the plan. The Company is authorized to issue up to an aggregate of 4,789,841 shares of its common stock under the plan. As of June 30, 2012, a total of 1,795,570 shares of common stock were available for future grants under the plan.

Share-based Compensation Expense

The Company accounts for its share-based arrangements in accordance with ASC 718, “Compensation-Stock Compensation.” The compensation expense for share-based awards with a service condition that cliff vest, is recognized on a straight-line basis over the award’s requisite service period based on its fair value on the date of grant. For those awards with a service condition that have graded vesting, compensation expense is calculated using the graded-vesting attribution method. This method entails recognizing compensation expense on a straight-line basis over the requisite service period for each separately vesting portion as if the grant consisted of multiple awards, each with the same service inception date but different requisite service periods. This method accelerates the recognition of compensation expense. In accordance with ASC 718, the pool of excess tax benefits available to absorb tax deficiencies was determined using the alternative transition method. Excess tax benefits, associated with the expense recognized for financial reporting purposes, are presented as a financing cash inflow rather than as a reduction of income taxes paid in our consolidated statement of cash flows and are recognized upon the exercise of stock options and determination of tax deductibility.

The fair value of market-based, performance vesting share awards is calculated using a Monte Carlo valuation model that simulates various potential outcomes of the option grant and values each outcome using the Black-Scholes valuation model which yields a fair market value of the Company's common stock on the date of the grant (measurement date). This amount is recognized over the vesting period, using the straight-line method. Since the award requires both the completion of four years of service and the share price reaching predetermined levels as defined in the option agreement, compensation cost will be recognized over the four year explicit service period. If the employee terminates prior to the four-year requisite service period, compensation cost will be reversed even if the market condition has been satisfied by that time. The total grant date fair value of the options granted during 2008 using the Monte Carlo valuation model was $1,026.

The Company records share-based compensation expense in the following categories included in the accompanying consolidated statement of operations:


	Three months ended June 30,				Six months ended June 30,
	2012		2011		2012		2011
Cost of revenues	$	102	$	72	$	187	$	118
Sales and marketing		419		282		710		435
General and administrative		1,740		1,169		3,148		2,006
Research and development		172		136		305		227
Total share-based compensation expense	$	2,433	$	1,659	$	4,350	$	2,786

As of June 30, 2012, there was $13,649 of total unrecognized compensation cost related to unvested share-based compensation arrangements granted under the 2005 Option Plan. That cost is expected to be recognized over a weighted-average period of 1.49 years.

Stock Options

The Company estimates the fair value of stock option awards using the Black-Scholes valuation model. Historically, expected volatility was based upon a weighted average of peer companies and the Company’s stock volatility; however, as of the third quarter ended September 30, 2011, expected volatility has been based solely upon the Company’s stock volatility. The expected life was determined based upon an average of the contractual life and vesting period of the options. The estimated forfeiture rate was based upon an analysis of historical data. The risk-free rate was based on U.S. Treasury zero coupon bond yields for periods commensurate with the expected term at the time of grant.

The following table provides the assumptions used in determining the fair value of service-based stock option awards:


	Six months ended June 30, 2012			Year ended December 31, 2011
Expected volatility		63.31-63.96	%		62.85-64.42	%
Expected dividends		—			—
Expected term (in years)		3.00 - 6.25			3.00 - 6.25
Risk-free rate		0.44-1.49	%		0.71-2.88	%

A summary of the activity of stock options under all plans as of June 30, 2012 is presented below:


	Outstanding Options
		Shares		Wtd. Avg. Exercise Price		Wtd. Avg. remaining contractual life in years			Aggregate Intrinsic Value (in thousands)
Outstanding at December 31, 2011			2,865,390	$	15.73
Granted			443,996	$	28.80
Exercised			(197,320)	$	14.99			$	2,905
Forfeited or expired			(390,875)	$	34.75
Outstanding at June 30, 2012			2,721,191	$	15.19		6.37	$	37,957
Exercisable at June 30, 2012			1,092,820	$	14.26		4.32	$	16,297

A summary of the status of the Company’s unvested stock options for the period ended June 30, 2012 is presented below:


Unvested Shares	Shares		Wtd. Avg. Grant Date Fair Value
Unvested at December 31, 2011		1,657,618	$	6.68
Granted		443,996		16.78
Vested		(454,368)		8.08
Forfeited or expired		(18,875)		12.34
Unvested at June 30, 2012		1,628,371	$	8.97

Restricted Stock and Restricted Stock Units

The fair value of restricted stock and restricted stock units is measured based upon the closing price of the Company’s underlying stock as of the date of grant. Restricted stock and restricted stock units are amortized over the vesting period using the straight-line method. Upon vesting, restricted stock units convert into an equivalent number of shares of common stock. A summary of the activity of restricted stock awards and restricted stock units under all plans as of June 30, 2012 is as follows:


	Restricted Stock Units		Restricted Stock Awards		Wtd. Avg. Grant Date Fair Value
Outstanding/unvested balance at December 31, 2011		189,650		7,104	$	22.11
Awarded		127,750		6,036	$	28.84
Released/vested		(50,206)		(7,104)	$	21.67
Forfeited/cancelled		(150)		—	$	31.25
Outstanding/unvested balance at June 30, 2012		267,044		6,036	$	25.50

Employee Stock Purchase Plan

The Employee Stock Purchase Plan, which was approved in May 2006, enables substantially all U.S. and foreign employees to purchase shares of our common stock at a 5% discounted offering price off the closing market price of our common stock on the offering date. The Company has granted rights to purchase up to 500,000 common shares to employees under the Plan. The Plan is not considered a compensatory plan in accordance with ASC 718 and requires no compensation expense to be recognized. As of June 30, 2012, there were 351,311 shares available for issuance pursuant to our 2006 Employee Stock Purchase Plan. Shares of our common stock purchased under the employee stock purchase plan were 12,504 and 23,417 for the periods ended June 30, 2012 and December 31, 2011, respectively.