SHARE-BASED COMPENSATION

During the three and six months ended December 28, 2012 and December 30, 2011, the Company granted stock options and restricted stock units to employees and non-employee directors under its 2005 Equity Incentive Plan and issued shares of the Company's common stock to participating employees under its 2005 Employee Stock Purchase Plan. Total share-based compensation expense was as follows (in thousands):



	Three Months Ended				Six Months Ended
	December 28, 2012		December 30, 2011		December 28, 2012		December 30, 2011
Cost of revenue	$	371	$	385	$	871	$	667
Research and development	588		507		1,127		1,022
Sales and marketing	423		439		809		800
General and administrative	1,114		909		2,200		1,820
Total share-based compensation expense	$	2,496	$	2,240	$	5,007	$	4,309

Determining Fair Value

The fair value of share-based awards was estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions for the following periods:



	Three Months Ended						Six Months Ended
	December 28, 2012			December 30, 2011			December 28, 2012			December 30, 2011
Option Plans Shares
Risk-free interest rate	0.7		%	0.8		%	0.7		%	1.1		%
Volatility	67.6		%	65.0		%	67.6		%	74.3		%
Weighted average expected life (in years)	5.00			4.46			5.00			4.64
Expected dividend yield	—			—			—			—
Weighted average fair value	$	3.67		$	6.15		$	3.67		$	8.34

ESPP Plan shares
Risk-free interest rate	0.2		%	0.1		%	0.2		%	0.1		%
Volatility	83.0		%	80.0		%	83.0		%	80.0		%
Weighted average expected life (in years)	1.25			1.25			1.25			1.25
Expected dividend yield	—			—			—			—
Weighted average fair value	$	4.39		$	6.43		$	4.39		$	6.43

Stock Option Activity

A summary of stock option activity for the six months ended December 28, 2012 was as follows:



	Options Outstanding
	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual term in years	Aggregate Intrinsic Value
						(in thousands)
Balance at June 29, 2012	3,703,660		$	10.79
Options granted	64,000		6.62
Options exercised	(144,190	)	5.36
Options cancelled	(207,754	)	12.36
Balance at December 28, 2012	3,415,716		$	10.84	5.28	$	4,787
Vested and expected to vest at December 28, 2012	3,237,345		$	10.88	5.08	$	4,498
Exercisable at December 28, 2012	2,365,234		$	11.28	3.79	$	3,146

The total intrinsic value of options exercised in the six months ended December 28, 2012 and December 30, 2011 was $0.4 million and $0.9 million, respectively. The total fair value of shares vested during the six months ended December 28, 2012 and December 30, 2011 was $2.1 million and $1.4 million, respectively.

As of December 28, 2012, there was $2.3 million of total unrecognized compensation cost related to non-vested stock options, which is expected to be recognized over a weighted average period of 1.21 years.

Restricted Stock Unit Activity

The following table summarizes the Company's activity with respect to restricted stock units (“RSUs”) for the six months ended December 28, 2012:



	Number of Shares
Balance at June 29, 2012	918,764
Awarded	785,489
Released	(131,942	)
Forfeited	(112,001	)
Balance at December 28, 2012	1,460,310
Vested and expected to vest at December 28, 2012	1,110,747

In August 2012, the Company granted time-based RSUs ("executive time-based RSUs") and performance-based RSUs (“executive PSUs”) to members of the Company's executive management team. The executive time-based RSUs vest over four years, with 25% vesting after one year and an additional 6.25% vesting quarterly thereafter, subject to the recipient's continuous service through each vesting date. The executive PSUs are eligible to vest upon the achievement of certain financial performance criteria for the Company for fiscal 2013. If the performance criteria are not met, none of the executive PSUs will vest and will be forfeited. If the performance criteria are met, 25% of the executive PSUs would vest following the Company's public announcement of financial results for fiscal 2013 and the remaining 75% of the executive PSUs would vest in three annual installments thereafter, subject to the recipient's continued service through each vesting date. For purposes of reporting and determining the share-based compensation expense, the company estimated that 231,250 PSUs will be awarded as of December 28, 2012. The Company assesses the achievement of these performance metrics on a quarterly basis.

As of December 28, 2012, there was $8.2 million of total unrecognized compensation cost related to RSUs, which is expected to be recognized over a weighted average period of 2.92 years.

RSUs are converted into common stock upon vesting. Upon the vesting of RSUs, the Company generally withholds a portion of the shares to cover applicable taxes and decreases the shares issued to the employee by a corresponding value. The withholding tax obligations are based upon the fair market value of the Company’s common stock on the vesting date. The number and the value of the shares withheld for tax purposes are summarized in the table below (in thousands except share amounts):



	Three Months Ended				Six Months Ended
	December 28, 2012		December 30, 2011		December 28, 2012		December 30, 2011
RSUs shares withheld for taxes	22,764		27,665		47,145		57,031
RSUs amounts withheld for taxes	$	188	$	397	$	375	$	818

Employee Stock Purchase Plan

At December 28, 2012, the total unrecognized compensation cost related to rights to purchase the Company's common stock under the employee stock purchase plan ("ESPP") was approximately $1.6 million. This cost will be amortized on a straight-line basis over approximately 1.6 years. The following table shows the shares issued and their respective weighted-average purchase price per share, pursuant to the ESPP, during the three and six months ended December 28, 2012 and December 30, 2011. As of December 28, 2012, the ESPP was offered primarily to employees located in the U.S. During the Company's next offering period, which will begin in February 2013, the Company will be offering this benefit to employees in various international locations.



	December 28, 2012		December 30, 2011
Shares issued	256,972		259,347
Weighted-average purchase price per share	$	6.76	$	5.99