NOTE 5-STOCKHOLDERS' EQUITY, STOCK PLANS AND STOCK-BASED COMPENSATION EXPENSE

Stock Option Plans

As of December 31, 2011, the Company had the following stock-based employee compensation plans:

2004 Employee Stock Purchase Plan

On January 12, 2004, the Board of Directors adopted the 2004 Employee Stock Purchase Plan. A total of 200,000 shares of common stock were reserved for issuance pursuant to the 2004 Employee Stock Purchase Plan. Under the 2004 Employee Stock Purchase Plan, or 2004 ESPP, eligible employees are permitted to purchase common stock at a discount through payroll deductions. The 2004 ESPP offering and purchase periods are for approximately six months. Shares of common stock eligible for purchase are increased on the first day of each fiscal year by an amount equal to the lesser of (i) 600,000 shares, (ii) 2.0% of the outstanding shares of common stock on such date or (iii) an amount as determined by the Board of Directors. The Company's Board of Directors voted not to increase the shares available for future grant on January 1, 2011 and 2010. The price of the common stock purchased is the lower of 85% of the fair market value of the common stock at the beginning of an offering period or at the end of the offering period. Under the 2004 ESPP the Company issued 45,161 shares in 2011 and 43,859 shares in 2010. At December 31, 2011, 1,056,936 shares remained available for future issuance.

2004 Equity Incentive Plan and 1998 Stock Plan

In 1998, the Company adopted the 1998 Stock Plan, or 1998 Plan, under which 4,650,000 shares of the Company's common stock were reserved for issuance to employees, directors and consultants.

On January 12, 2004, the Board of Directors adopted the 2004 Equity Incentive Plan. A total of 1,750,000 shares of common stock were originally reserved for issuance pursuant to the 2004 Equity Incentive Plan. In addition, the shares reserved for issuance under the 2004 Equity Incentive Plan included shares reserved but un-issued under the 1998 Plan and shares returned to the 1998 Plan as the result of termination of options or the repurchase of shares.

Options granted under the 1998 Plan and 2004 Equity Incentive Plan may be incentive stock options or non-statutory stock options. Stock purchase rights may also be granted under the 2004 Equity Incentive Plan. Incentive stock options may only be granted to employees. The Board of Directors determines the period over which options become exercisable, however, except in the case of options granted to officers, directors and consultants, options shall become exercisable at a rate of no less than 20% per year over five years from the date the options are granted. Options are to be granted at an exercise price not less than the fair market value per share on the grant date for incentive options or 85% of fair market value for nonqualified stock options. For employees holding more than 10% of the voting rights of all classes of stock, the exercise price shall not be less than 110% of the fair market value per share on the grant date. Options granted under the Plan to employees generally become exercisable 25% on the first anniversary of the vesting commencement date and an additional 1/48th of the total number of shares subject to the option shares shall become exercisable on the last day of each calendar month thereafter until all of the shares have become exercisable. Unvested options that have been exercised are subject to repurchase upon termination of the holder's status as an employee, director or consultant. The contractual term of the options granted is either five, seven or ten years.

In accordance with the 2004 Equity Incentive Plan, the Company's non-employee directors are granted $60,000 of grant date fair value, fully vested, stock awards annually on the date of the Company's Annual Meeting of stockholders. In the year ended December 31, 2011 and 2010, the Company issued 37,925 and 37,266 shares of stock, respectively. In addition, in the year ended December 31, 2011 and 2010, the Company's Board of Directors granted 39,300 and 109,025, respectively, of RSUs to certain members of the Company's management. These RSUs vest at the rate of one-third on June 1of the year of grant, and one-third in each of the subsequent two years. The Company measured the fair market values of the underlying stock on the dates of grant and recognizes the stock-based compensation expense using the straight-line method over the vesting period.

The Company issues new shares upon the exercise of options, restricted stock units and ESPP shares.

Option Exchange Program

In July 2009, the Company completed its Option Exchange Program for its employees to exchange certain options outstanding for new options to purchase shares of the Company's common stock. As a result, options to purchase 864,373 shares of the Company's common stock were cancelled and new options to purchase up to 447,841 shares of the Company's common stock were issued in exchange. The new options have an exercise price per share of $8.49, the closing price of the Company's common stock as reported on the Nasdaq Global Select Market on the date that the offer expired and Option Exchange Program was completed, are unvested as of the grant date, and subject to an additional six (6) months of vesting over and above the vesting schedule of the surrendered options.

Given the Option Exchange Program was designed to be approximately a “value-for-value” exchange, the Company did not incur any significant additional non-cash compensation charges as the fair value of the replacement options was approximately equal to or less than the fair value of the surrendered options. The Company determined the fair value of stock options using the Black Scholes valuation model.

Option Activity

Activity under the 1998 Plan and 2004 Equity Incentive Plan is summarized as follows:

				Options Outstanding
	Shares Available For Grant			Number of Shares			Weighted- Average Exercise Price		Weighted-Average Remaining ContractualLife (in years)		Aggregate Intrinsic Value (in $ millions)(1)
Balances as of December 31, 2008		2,013,089			3,081,733		$	12.94		4.6		6.0
Options granted (2)		(1,409,371	)		1,409,371		$	8.51
Options exercised		-			(527,721	)	$	0.55
Options cancelled (expired or forfeited) (2)		1,270,828			(1,270,828	)	$	17.55
Stock awards granted		(36,540	)		-			-
Restricted stock units cancelled (expired or forfeited)		2,375			-			-
Balances as of December 31, 2009		1,840,381			2,692,555		$	10.87		5.1	$	1.6
Options granted (2)		(961,500	)		961,500		$	10.14
Options exercised		-			(90,362	)	$	3.74
Options cancelled (expired or forfeited) (2)		267,274			(267,274	)	$	9.91
Stock awards granted		(146,291	)		-			-
Restricted stock units cancelled (expired or forfeited)		5,583			-			-
Balances as of December 31, 2010		1,005,447			3,296,419		$	10.93		4.4	$	1.1
Options granted (2)		(1,206,500	)		1,206,500		$	8.61
Options exercised		-			(207,624	)	$	5.92
Options cancelled (expired or forfeited) (2)		746,273			(746,273	)		13.40
Stock awards granted		(77,225	)		-			-
Restricted stock units cancelled (expired or forfeited)		6,542			-			-
Balances as of December 31, 2011		474,537			3,549,022		$	9.92		4.6	$	0.4
Exercisable as of December 31, 2011					1,806,558		$	10.86		3.5	$	0.4

(1)	Based on the closing stock price of the Company's stock of $7.45 on December 30, 2011, $8.29 on December 31, 2010 and $8.51 on December 31, 2009.

(2)	Included in options granted and options cancelled are shares granted and cancelled in connection with the Company's Option Exchange Program in 2009 (see ‘Option Exchange Program' above for more details).

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the aggregate difference between the Company's closing stock price on the last trading day of the fiscal year and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on December 31, 2011. The aggregate intrinsic amount changes based on the fair market value of the Company's common stock. Total intrinsic value of options exercised was $521,000 in 2011, $128,000 in 2010, and $3.2 million in 2009. The options outstanding and exercisable at December 31 of the respective year were in the following exercise price ranges:

		Options Outstanding			Options Exercisable
Range of Exercise Prices		Number Outstanding	Weighted-Average Remaining Contractual Life (in years)		Number Outstanding	Weighted-Average Exercise Price
$	4.25–$8.48	381,425		3.69	179,508	$	5.15
$	8.49–$8.49	296,773		2.93	258,193		8.49
$	8.66–$8.66	599,833		4.20	414,797		8.66
$	8.72–$8.72	811,500		6.31	-		-
$	8.75–$9.74	174,000		7.62	45,376		9.38
$	10.24–$10.24	625,916		5.18	259,982		10.24
$	10.43–$14.14	423,196		2.92	412,323		11.85
$	14.78–$24.46	207,254		3.04	207,254		20.26
$	25.39–$25.39	20,000		2.47	20,000		25.39
$	25.73–$25.73	9,125		2.59	9,125		25.73
$	4.25–$25.73	3,549,022		4.63	1,806,558	$	10.86

As of December 31, 2010 there were 1,679,268 options that were exercisable at a weighted average exercise price of $12.12.

Restricted Stock Units and Stock Awards

Information with respect to restricted stock units activity is as follows (in thousands):

	Number of Shares			Weighted-Average Grant- Date Fair Value		Aggregate Fair Value (1) (in thousands)
Outstanding at December 31, 2010		67,096		$	10.24
Granted		77,225		$	8.32
Vested (2)		(82,526	)	$	8.93	$	691	(3)
Forfeited		(6,542	)	$	9.99
Outstanding at December 31, 2011		55,253		$	9.55

(1)	Represents the value of the Company's stock on the date that the restricted stock units vest.

(1)	The number of restricted stock units vested includes shares that the Company withheld on behalf of the employees to satisfy the statutory tax withholding requirements.

(3)	On the grant date, the fair value for these vested awards was $737,000.

Stock-Based Compensation

Stock-based compensation expense for stock options, restricted stock units, stock awards and ESPP shares for the year ended December 31, 2011, 2010 and 2009 was as follows (in thousands):

	Year EndedDecember 31,
	2011		2010		2009
Stock options	$	3,047	$	3,628	$	3,763
RSUs and Stock awards		775		927		360
ESPP		85		95		113
Total stock-based compensation expense	$	3,907	$	4,650	$	4,236

Total stock-based compensation expense by department recognized during the year ended December 31, 2011, 2010 and 2009 was as follows (in thousands):

	Year EndedDecember 31,
	2011		2010		2009
Cost of revenue	$	659	$	724	$	717
Sales and marketing		788		1,189		1,044
Research and development		698		629		473
General and administrative		1,762		2,108		2,002
Total stock-based compensation expense	$	3,907	$	4,650	$	4,236

As of December 31, 2011, the unrecognized compensation cost, net of expected forfeitures, was $4.6 million for stock options and stock awards, which will be recognized using the straight- line attribution method over an estimated weighted-average remaining amortization period of 2.49 years. For the ESPP, the unrecognized compensation cost, net of expected forfeitures, was $31,000, which will be recognized using the straight- line attribution method over an estimated weighted-average amortization period 0.33 years.

Valuation Assumptions and Fair Value of Stock Option and ESPP Grants

The Company uses the Black-Scholes option pricing model to estimate the fair value of options granted under its equity incentive plans and rights to acquire stock granted under its employee stock purchase plan. The Company based the weighted average estimated values of employee stock option grants and rights granted under the employee stock purchase plan, as well as the weighted average assumptions used in calculating these values, on estimates at the date of grant, as follows:

	Stock Options									Stock Purchase Plan
	2011			2010			2009			2011			2010			2009
Estimated fair value of grants during the year	$	3.10		$	3.76		$	3.93		$	2.06		$	2.41		$	2.39
Expected term (in years)(1)		4.15			3.84			4.23			0.50			0.50			0.50
Risk-free interest rate(2)		1.41	%		1.73	%		2.6	%		0.08	%		0.2	%		0.1	%
Volatility(3)		43	%		46	%		55	%		39	%		40	%		52	%
Dividend yield(4)		-	%		-	%		-	%		-	%		-	%		-	%

(1)

The expected term represents the period during which the Company's stock-based awards are expected to be outstanding. The estimated term is based on historical experience of similar awards, giving consideration to the contractual terms of the awards, vesting requirements, and expectation of future employee behavior, including post-vesting terminations.

(2)	The risk-free interest rate is based on U.S. Treasury debt securities with maturities close to the expected term of the option as of the date of grant.

(3)	Expected volatility is a 50%/50% blend of implied and historical volatility. The Company has determined that this is a more reflective measure of market conditions and a better indicator of expected volatility, than its limited historical volatility since the IPO of its common stock.

(4)	The Company has not historically issued any dividends and does not expect to do so in the foreseeable future.

The Company periodically estimates forfeiture rates based on its historical experience within separate groups of employees and adjusts the stock-based payment expense accordingly.