STOCK PLANS AND SHARE-BASED COMPENSATION:

Stock Plans

As of March 31, 2012, the Company had two stock-based compensation plans (the “Plans”) which are described below.

2007 Equity Incentive Plan

The 2007 Equity Incentive Plan (the "2007 Plan") was adopted by the board of directors on September 10, 2007 and approved by the stockholders on November 7, 2007 as an amendment and restatement of the 1997 Stock Option Plan (the "1997 Plan"). The 2007 Plan provides for the grant of incentive stock options, nonstatutory stock options, restricted stock awards, restricted stock unit awards ("RSUs"), stock appreciation rights, performance stock awards and other stock awards to employees, directors and consultants. As of March 31, 2012, the maximum remaining number of shares that may be issued under the 2007 Plan was 6,352,885 shares, which includes options issued but not exercised and awards granted but unvested and shares remaining available for issuance under the 1997 Plan, including shares subject to outstanding options and stock awards under the 1997 Plan. Pursuant to the 2007 Plan, the exercise price for incentive stock options and nonstatutory stock options is generally at least 100% of the fair market value of the underlying shares on the date of grant. Options generally vest over 48 months measured from the date of grant. Options generally expire no later than ten years after the date of grant, subject to earlier termination upon an optionee's cessation of employment or service.

Beginning January 27, 2009, grants pursuant to the Directors Equity Compensation Program (that was adopted by the board of directors on January 27, 2009) to nonemployee directors have been made primarily under the 2007 Plan. The Directors Equity Compensation Program provides in certain circumstances (depending on the status of the particular director's holdings of Company stock options) for the automatic grant of nonstatutory stock options to nonemployee directors of the Company on the first trading day of July in each year over their period of service on the board of directors. Further, each future nonemployee director of the Company would be granted under the 2007 Plan: (a) on the first trading day of the month following commencement of service, an option to purchase the number of shares of common stock equal to: the fraction of a year between the date of the director's appointment to the board of directors and the next July 1, multiplied by 8,000, which option shall vest on the next July 1^st; and (b) on the first trading day of July following commencement of service, an option to purchase 24,000 shares vesting monthly over the three year period commencing on the grant date. The Directors Equity Compensation Program will remain in effect at the discretion of the board of directors or the compensation committee.

On July 28, 2009, the 2007 Plan was amended generally to prohibit outstanding options or stock appreciation rights from being cancelled in exchange for cash without stockholder approval.

1997 Employee Stock Purchase Plan

Under the 1997 Employee Stock Purchase Plan (the “Purchase Plan”), eligible employees may apply accumulated payroll deductions, which may not exceed 15% of an employee's compensation, to the purchase of shares of the Company's common stock at periodic intervals. The purchase price of stock under the Purchase Plan is equal to 85% of the lower of (i) the fair market value of the Company's common stock on the first day of each offering period, or (ii) the fair market value of the Company's common stock on the purchase date (as defined in the Purchase Plan). Each offering period consists of one purchase period of approximately six months duration. An aggregate of 3,000,000 shares of common stock were reserved for issuance to employees under the Purchase Plan. As of March 31, 2012, 2,412,036 shares had been purchased and 587,964 shares were reserved for future issuance under the Purchase Plan.

Stock-Based Compensation

The Company applies the provisions of ASC 718-10. Under the provisions of ASC 718-10, the Company recognizes the fair value of stock-based compensation in financial statements over the requisite service period of the individual grants, which generally equals a four-year vesting period. The Company uses estimates of volatility, expected term, risk-free interest rate, dividend yield and forfeitures in determining the fair value of these awards and the amount of compensation expense to recognize. The Company uses the straight-line method to amortize all stock awards granted over the requisite service period of the award.

Determining Fair Value of Stock Options

The Company uses the Black-Scholes valuation model for valuing stock option grants using the following assumptions and estimates:

Expected Volatility. The Company calculates expected volatility as an average of implied volatility and historical volatility.

Expected Term. The Company utilizes a model which uses historical exercise, cancellation and outstanding option data to calculate the expected term of stock option grants.

Risk-Free Interest Rate. The Company bases the risk-free interest rate used in the Black-Scholes valuation model on the implied yield available on a U.S. Treasury note with a term approximately equal to the expected term of the underlying grants.

Dividend Yield. The dividend yield was calculated by dividing the annual dividend by the average closing price of the Company's common stock on a quarterly basis.

Estimated Forfeitures. The Company uses historical data to estimate pre-vesting forfeitures, and records share-based compensation expense only for those awards that are expected to vest.

The following table summarizes the stock-based compensation expense recognized in accordance with ASC 718-10 for the three months ended March 31, 2012 and March 31, 2011 (in thousands).



	Three Months Ended
	March 31,
	2012		2011
Cost of revenues	$	245	$	239
Research and development	1,120		811
Sales and marketing	747		667
General and administrative	919		787
Total stock-based compensation expense	$	3,031	$	2,504

As of March 31, 2012 there were approximately $5.0 million, net of expected forfeitures, of total unrecognized compensation expense related to stock options. The unrecognized compensation expense at March 31, 2012 is expected to be recognized over a weighted-average period of 1.7 years.

As of March 31, 2012, the Company had $11.3 million of total unrecognized compensation expense, net of estimated forfeitures, related to restricted stock units. The unamortized compensation expense will be recognized on a straight-line basis over a weighted-average period of 2.6 years.

As of March 31, 2012, the Company had $2.8 million of total unrecognized compensation expense, net of estimated forfeitures, related to performance-based share grants. The unamortized compensation expense will be recognized on a straight-line basis, and is expected to be recognized over the remainder of 2012.

As of March 31, 2012, the total unrecognized compensation cost under the Purchase Plan to purchase the Company's common stock was approximately $0.4 million. The Company will amortize this cost on a straight-line basis over approximately 0.5 years.

Stock compensation expense in the three months ended March 31, 2012 was $3.0 million; consisting of approximately $0.9 million related to stock options, $0.4 million related to performance shares, $1.4 million related to restricted stock units and $0.3 million related to the Purchase Plan.

Stock compensation expense in the three months ended March 31, 2011, was $2.5 million; consisting of approximately $1.2 million related to stock options, $0.3 million related to performance shares, $0.6 million related to restricted stock units and $0.3 million related to the Purchase Plan.

The Company did not grant stock options in the first quarter of 2012 or 2011, and therefore no fair value assumptions were reported for those periods.

The fair value of employees’ stock purchase rights under the Purchase Plan was estimated using the Black-Scholes model with the following weighted-average assumptions:



	Three Months Ended
	March 31,
	2012	2011
Risk-free interest rates	0.09%	0.17%
Expected volatility rates	48%	37%
Expected dividend yield	0.54%	0.51%
Expected term of purchase right (years)	0.5	0.5
Weighted-average estimated fair value of purchase rights	$10.42	$9.40

A summary of stock option activity under the Plans, excluding performance-based shares and restricted stock units, as of March 31, 2012, and changes during the three months then ended, is presented below:



	Shares (in thousands)		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value (in thousands)
Outstanding at January 1, 2012	3,557		$	24.01
Granted	—		—
Exercised	(215	)	19.58
Forfeited or expired	(3	)	21.09
Outstanding at March 31, 2012	3,339		$	24.29	4.52	$	43,032
Exercisable at March 31, 2012	2,866		$	23.44	3.96	$	39,249
Vested and expected to vest at March 31, 2012	3,322		$	24.24	4.50	$	42,986

The Company did not grant stock options in the three months ended March 31, 2012 and 2011; since 2010 the Company's equity grants to new hires and its annual incentive grants to non-executive employees have been primarily in the form of RSUs. The total intrinsic value of options exercised during the three months ended March 31, 2012 and 2011 was $3.9 million and $6.2 million, respectively.

Performance-based Awards

Under the performance-based awards program, the Company grants awards in the first half of the performance year in an amount equal to twice the target number of shares to be issued if the target performance metrics are met. The number of shares that are released at the end of the performance year can range from zero to 200% of the targeted number depending on the Company's performance. The performance metrics of this program are annual targets consisting of net revenue, non-GAAP operating earnings and strategic goals. Each performance-based award granted from the 2007 Plan will reduce the number of shares available for issuance under the 2007 Plan by 2.0 shares.

During the three months ended March 31, 2012, the Company issued approximately 96,000 performance-based awards to employees and executives. As the net revenue and non-GAAP operating earnings are considered performance conditions, expenses associated with these awards, net of estimated forfeitures, are recorded throughout the year depending on the number of shares expected to be earned based on progress toward the performance targets. The cost of performance-based awards is determined using the fair value of the Company's common stock on the grant date, reduced by the discounted present value of dividends expected to be declared before the awards vest. If the performance conditions are not achieved, no compensation cost is recognized and any previously recognized compensation is reversed.

In January 2012, it was determined that the Company had not reached the minimum level of the established performance targets for the performance-based awards granted in 2011. Accordingly, the 93,000 performance-based awards granted in the first quarter of 2011 were canceled.

A summary of performance-based awards outstanding as of March 31, 2012, and activity during the three months then ended, is presented below:



	Shares (in thousands)	Weighted- Average Grant Date Fair Value Per Share		Weighted-Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value (in thousands)
Outstanding at January 1, 2012	—	$	—
Granted	96	37.28
Vested	—	—
Forfeited or expired	—	—
Outstanding at March 31, 2012	96	$	37.28	0.75	$	3,556
Vested and expected to vest at March 31, 2012	92			0.75	$	3,409

The weighted-average grant-date fair value per share of performance-based awards granted in the three months ended March 31, 2012 and 2011 was approximately $37.28 and $36.90, respectively. The grant date fair value of awards released, which were fully vested, in the three months ended March 31, 2011 was approximately $3.0 million. There were no performance-based awards released in the three months ended March 31, 2012, as the performance-based awards granted in 2011 were canceled.

Restricted Stock Units (RSUs)

The Company grants restricted stock units to employees under the 2007 Plan. RSUs granted to employees typically vest ratably over a four-year period, and are converted into shares of the Company's common stock upon vesting on a one-for-one basis subject to the employee's continued service to the Company over that period. The cost of the RSUs is determined using the fair value of the Company's common stock on the date of the grant, reduced by the discounted present value of dividends expected to be declared before the awards vest. Compensation is recognized on a straight-line basis over the requisite service period of each grant adjusted for estimated forfeitures. Each RSU award granted from the 2007 plan will reduce the number of shares available for issuance under the 2007 Plan by 2.0 shares.

A summary of RSUs outstanding as of March 31, 2012, and changes during the three months then ended, is as follows:



	Shares (in thousands)		Weighted- Average Grant Date Fair Value Per Share		Weighted-Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value (in thousands)
Outstanding at January 1, 2012	458		$	36.08
Granted	3		35.12
Vested	(5	)	37.23
Forfeited or expired	(6	)	37.09
Outstanding at March 31, 2012	450		$	36.04	1.38	$	16,708
Outstanding and expected to vest at March 31, 2012	420				1.37	$	15,596

The weighted-average grant-date fair value of RSUs awarded in the three months ended March 31, 2012 and 2011 was approximately $35.12 and $38.66, respectively. The grant date fair value of awards vested in the three months ended March 31, 2012 and 2011 was approximately $0.2 million and $0.1 million, respectively.