2. Stock-Based Compensation — The Company has two stock option plans and an employee stock purchase plan (ESPP)—the 1998 Stock Option Plan, the 2004 Equity Incentive Plan and the 2004 Employee Stock Purchase Plan. The Company recognized stock-based compensation expenses for the three and six months ended June 30, 2012 and 2011, as follows (in thousands):

The Company’s Board of Directors adopted the Company’s 2004 Equity Incentive Plan in March 2004, and the Company’s stockholders approved it in November 2004. Options granted under the 2004 Plan have a maximum term of ten years. New hire grants generally vest over four years at the rate of 25 percent one year from the date of grant and 1/48th monthly thereafter. Refresh grants generally vest over four years at the rate of 50 percent two years from the date of grant and 1/48th monthly thereafter. There were 800,000 shares initially reserved for issuance under the 2004 Plan. The 2004 Plan provides for annual increases in the number of shares available for issuance beginning on January 1, 2005 equal to the lesser of: 5% of the outstanding shares of common stock on the first day of the year, 2,400,000 shares, or a number of shares determined by the Board of Directors. The following is a summary of the 2004 Plan, which includes stock options and restricted stock awards and units:

The total fair value of options that vested during the three months ended June 30, 2012 and 2011 was $0.8 million and $1.5 million, respectively, and the total fair value of options that vested during the six months ended June 30, 2012 and 2011 was $1.7 million and $3.1 million. The total intrinsic value of options exercised during the three months ended June 30, 2012 and 2011 was $2.8 million and $0.7 million, respectively. The total intrinsic value of options exercised was $5.5 million during both the six months ended June 30, 2012 and 2011. Net cash proceeds from the exercise of stock options were $3.4 million for the three months ended June 30, 2012 and $0.7 million for the three months ended June 30, 2011. Net cash proceeds from the exercise of stock options were $7.3 million for the six months ended June 30, 2012 and $4.3 million for the six months ended June 30, 2011. At June 30, 2012, unamortized compensation expense related to unvested options was approximately $2.6 million, net of estimated forfeitures. The weighted average period over which compensation expense related to these options will be recognized is approximately 1.8 years.

The employee stock-based compensation expense recognized under Accounting Standards Codification (“ASC”) 718-10-30 Compensation – Stock Compensation –Overall - Initial Measurement, was determined using the Black-Scholes option pricing model. Option pricing models require the input of subjective assumptions and these assumptions can vary over time. The Company did not grant any stock option awards during the three months ended June 30, 2012. Weighted-average assumptions to determine the fair values of stock option awards granted were as follows:

In estimating the expected term, the Company considers its historical stock option exercise experience, post vesting cancellations and remaining contractual term of the options outstanding. In estimating the expected volatility, the Company uses its own historical data to determine its estimated expected volatility. The Company uses the U.S. Treasury constant maturity yield based on the expected term for its risk-free interest rate and a dividend yield of zero as it does not issue dividends. The Company applies a forfeiture rate that is based on options that have been forfeited historically.

The Company grants restricted stock units (RSUs), which vest generally over four years as determined by the Company’s Compensation Committee, and are issued upon vesting. Before vesting, these restricted stock units are not eligible for dividends, if and when declared. A summary of the restricted stock units is presented in the table below:

The total expense recognized for RSUs was $2.9 million for the three months ended June 30, 2012 and $2.1 million for the three months ended June 30, 2011. The total expense recognized for RSUs was $5.1 million for the six months ended June 30, 2012 and $4.6 million for the six months ended June 30, 2011, respectively. The intrinsic value on the vesting date related to restricted stock units released for the three months ended June 30, 2012 and 2011 was $2.4 million and $1.4 million, respectively, and the intrinsic value on the vesting date related to restricted stock units released for the six months ended June 30, 2012 and 2011 was $4.4 million and $3.1 million, respectively. The intrinsic value related to restricted stock units outstanding at June 30, 2012 and 2011 was $36.6 million and $21.8 million, respectively. At June 30, 2012, the unamortized compensation expense related to unvested restricted stock units was approximately $22.1 million, net of estimated forfeitures, with a weighted average remaining recognition period of 2.6 years.

On February 25, 2010, the Board granted 416,000 performance units to the Company’s executive officers. These performance units generally vest over four years, with a graded acceleration feature that allows all or a portion of these awards to be accelerated if certain performance conditions are satisfied. The amount of shares to be accelerated is based on achieving certain performance targets, with the minimal acceleration occurring if performance exceeds at least 110% of non-GAAP earnings per share as set forth in the Company’s annual operating plan approved by the Board, as determined by the Compensation Committee in its sole discretion. The Compensation Committee has the discretion not to accelerate any shares, if it so chooses, even if the performance targets are met. To date, none of the shares have been accelerated.

The Company granted 153,000 Time-based RSUs to its CEO in February 2011. In the fourth quarter of 2011, the compensation committee proposed modifying half of the Time-based RSUs to Performance-based RSUs and on February 7, 2012 the Board approved the performance goals based on the Company’s 2012 revenue (“2012 Modification”). The Performance-based RSUs will vest on a quarterly basis during the period following the achievement of the goal. The maximum number of RSUs the CEO may receive is 100% of the Performance-based RSUs originally granted.

On February 14, 2012, the Board granted 413,000 Restricted Stock Units (“RSUs) to the Company’s executive officers. Fifty percent of RSUs granted to Company’s executive officers will vest over two years on a quarterly basis (“Time-based RSUs”) and 50% of the units will represent a target number of RSUs awarded upon achievement of a pre-determined goal (“2012 Executive RSUs ”) for the Company’s revenue in 2013 (“Performance-based RSUs”). Half of these Performance-based RSUs will vest when earned with the remainder vesting during the following two years on a quarterly basis. The maximum number of RSU an executive employee may receive is 300% of the Performance-based RSUs originally granted. The Performance-based RSUs earned will be reduced by maximum 15% in the event that the Company’s total shareholder return (“TSR”), defined as the cumulative change in share price plus dividends, as compared to the Company’s compensation peer group is below a specified percentile for calendar years 2012 and 2013.

On April 24, 2012, the Company granted 344,650 RSUs to its existing non-executive employees. These RSUs grants include 219,317 Time-based RSUs and 125,333 Performance-based RSUs. The Performance-based RSUs will be a target number of RSUs awarded upon achievement of a pre-determined goal (“2012 Non-Executive RSUs”) for the reported revenue of the Company, certain regions or product-line divisions in 2013. Half of these Performance-based RSUs will vest when earned with the remainder vesting during the following two years on a quarterly basis. The maximum number of RSUs an employee may receive is 300% of the Performance-based RSUs originally granted.

Based on the Company’s revenue forecast as of June 30, 2012, the Company has determined that it is probable that it will be able to achieve the pre-determined goal for the 2012 Modification, 2012 Executive RSUs and for the majority of 2012 Non-Executive RSUs which will allow the eligible employees to receive 100% of the RSUs originally granted. The Company has recorded stock-based compensation expense for the Performance-based RSUs, expected to meet the pre-determined goal, based on grant date fair value adjusted for forfeiture rate which will be amortized based on graded-vesting method.

Under the 2004 Employee Stock Purchase Plan (the Purchase Plan), eligible employees may purchase common stock through payroll deductions. Participants may not purchase more than 2,000 shares in a six-month offering period or stock having a value greater than $25,000 in any calendar year as measured at the beginning of the offering period in accordance with the Internal Revenue Code and applicable Treasury Regulations. A total of 200,000 shares of common stock were reserved for issuance under the Purchase Plan. The Purchase Plan provides for an automatic annual increase beginning on January 1, 2005 by an amount equal to the lesser of: 1,000,000 shares, 2% of the outstanding shares of common stock on the first day of the year, or a number of shares as determined by the Board of Directors. For the six months ended June 30, 2012 and 2011, 97,247 shares and 70,685 shares, respectively, were issued under the Purchase Plan. The following is a summary of the Purchase Plan and changes during the six months ended June 30, 2012:

The Purchase Plan is considered compensatory under ASC 718-50-25, Compensation – Stock Compensation - Employee Share Purchase Plans - Recognition, and is accounted for in accordance with ASC 718-50-30 Compensation – Stock Compensation - Employee Share Purchase Plans - Initial Measurement - Look-Back Plans. The intrinsic value for stock purchased was $0.7 million and $0.2 million for each of the six months ended June 30, 2012 and 2011, respectively. The unamortized expense as of June 30, 2012 was $0.1 million, which will be recognized over 0.1 years. The Black-Scholes option pricing model was used to value the employee stock purchase rights. For the six months ended June 30, 2012 and 2011, the following weighted average assumptions were used in the valuation of the stock purchase rights: