4. Stockholders’ Equity and Employee Stock Option Plans:

Stock-based Compensation Expense

The following table summarizes stock-based compensation expense for the three and nine months ended September 30, 2012 and 2011 and its allocation within the condensed consolidated statements of operations (in thousands):



	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2012		2011			2012		2011
Cost of revenues:
Cost of product	$	166	$	221		$	462	$	627
Cost of service	31		29			82		62
Operating expenses:
Product development	619		1,017			1,874		2,811
Sales and marketing	455		307			1,460		1,510
General and administrative	535		(403		)	1,687		1,734
Total	$	1,806	$	1,171		$	5,565	$	6,744

Stock Award Activity

There were no options exercised for the three and nine month periods ended September 30, 2012. The total intrinsic value of options exercised during the three and nine months ended September 30, 2011 was approximately $86,000 and $1.2 million, respectively. The intrinsic value is calculated as the difference between the market value on the date of exercise and the exercise price of the options.

The total fair value of RSUs vested and released during the three and nine months ended September 30, 2012 was approximately $723,000 and $3.4 million, respectively. The total fair value of RSUs vested and released during the three and nine months ended September 30, 2011 was approximately $742,000 and $4.6 million, respectively. The fair value is calculated by multiplying the fair market value of the Company’s stock on the vesting date by the number of shares vested.

Stock-based Compensation Expense for Awards with Financial-Based Performance Vesting Requirements

As of September 30, 2012, there were 230,000 unvested RSUs and RSAs that were subject to service-based vesting conditions as well as certain financial or other performance-based vesting requirements that must be achieved before vesting can occur.

Through September 30, 2012, cumulative compensation expense of $621,000 associated with these 230,000 unvested RSUs and RSAs has been recognized. From the date of grant through June 30, 2012, the Company had believed it was probable that the associated performance requirements would be achieved and therefore recognized expense on these awards. During the third quarter of 2012 and as of September 30, 2012, the Company believed that the performance condition is no longer probable of achievement. However, the Company has not yet determined that the performance condition is improbable of achievement. Therefore, beginning in the third quarter of 2012, that Company has discontinued the recognition of compensation costs related to these awards. If, prior to the expiration of the RSUs and RSAs, the Company determines that the performance condition is again probable, compensation expense will once again be recognized. Alternatively, if the Company determines that the performance condition is improbable of achievement, the cumulative compensation expense of $621,000 associated with these awards will be reversed.