STOCK PLANS AND SHARE-BASED COMPENSATION:

Stock Plans

As of June 30, 2014, 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-based awards ("PSUs"), long-term performance based awards ("PRSUs") and other stock awards to employees, directors and consultants. As of June 30, 2014, the maximum remaining number of shares that may be issued under the 2007 Plan was 6,619,099 shares, which includes options granted 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 (which was adopted by the board of directors on January 27, 2009) to non-employee directors have been made primarily under the 2007 Plan. The Directors Equity Compensation Program provides for grants to outside directors as follows: effective annually, upon the first trading day of July, each outside director receives a grant of an equity award with an aggregate value of $100,000, which will become exercisable or vest immediately prior to the Company's next annual meeting of stockholders, subject to the director's continued service. At each outside director's election, such award may consist entirely of RSUs or entirely of stock options. The quantity of options would be calculated by dividing $100,000 by the Black-Scholes value on the date of grant. The quantity of RSUs issued would be calculated by dividing $100,000 by the grant-date fair value. Further, on the date of election of a new outside director, such new director would receive such grant as continuing outside directors receive on the first trading day of July; provided, however, that such grant is prorated for the portion of the year that such new outside director will serve until the next first trading day of July. The Directors Equity Compensation Program will remain in effect at the discretion of the board of directors or the compensation committee of the board.

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 June 30, 2014, 2,646,861 shares had been purchased and 353,139 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, and uses historical data to estimate pre-vesting forfeitures, recognizing expense only for those awards that are expected to vest.

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 based on the historical price volatility of the Company's stock.

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.

The following table summarizes the stock-based compensation expense recognized in accordance with ASC 718-10 for the three and six months ended June 30, 2014, and June 30, 2013 (in thousands).



	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2014		2013		2014		2013
Cost of revenues	$	298	$	264	$	517	$	528
Research and development	1,339		1,640		2,551		2,746
Sales and marketing	864		795		1,799		1,624
General and administrative	1,674		1,629		3,223		3,066
Total stock-based compensation expense	$	4,175	$	4,328	$	8,090	$	7,964

Stock-based compensation expense in the three months ended June 30, 2014, was $4.2 million (comprising approximately $0.5 million related to stock options, $0.7 million related to performance-based awards, $2.7 million related to RSUs and $0.3 million related to the Purchase Plan). In the six months ended June 30, 2014, stock compensation expense was $8.1 million (comprising approximately $1.0 million related to stock options, $1.3 million related to performance-based awards, $5.2 million related to RSUs and $0.6 million related to the Purchase Plan).

Stock-based compensation expense in the three months ended June 30, 2013, was $4.3 million (comprising approximately $0.7 million related to stock options, $0.9 million related to performance-based awards, $2.4 million related to RSUs and $0.3 million related to the Purchase Plan). In the six months ended June 30, 2013, stock based compensation was $8.0 million (comprising approximately $1.7 million related to stock options, $1.3 million related to performance-based awards, $4.4 million related to RSUs and $0.6 million related to the Purchase Plan).

The following table summarizes total compensation expense related to unvested awards not yet recognized, net of expected forfeitures, and the weighted-average period over which it is expected to be recognized as of June 30, 2014.



	June 30, 2014
	Unrecognized Compensation Expense for Unvested Awards			Weighted Average Remaining Recognition Period
	(In thousands)			(In years)
Options		$	1,215		1.51
Performance-based awards		1,948			0.50
Long term performance-based awards		1,961			2.50
Restricted stock units		24,534			2.76
Purchase plan		101			0.50
Total unrecognized compensation expense		$	29,759

The Company did not grant stock options in the three and six months ended June 30, 2014 or June 30, 2013, and therefore no fair-value assumptions were reported.

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		Six Months Ended
	June 30,		June 30,
	2014	2013	2014	2013
Risk-free interest rates	—%	—%	0.07%	0.11%
Expected volatility rates	—%	—%	30%	33%
Expected dividend yield	—%	—%	0.66%	0.80%
Expected term of purchase right (in years)	0	0	0.5	0.5
Weighted-average estimated fair value of purchase rights	$—	$—	$13.31	$9.14

__________________________

*There were no employee stock purchase rights granted in the three months ended June 30, 2014 and 2013.

A summary of stock option activity under the Plans, excluding performance-based awards and restricted stock units, as of June 30, 2014, and changes during the six 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, 2014	1,691		$27.34
Granted	—		—
Exercised	(256	)	$29.80
Forfeited or expired	—		—
Outstanding at June 30, 2014	1,435		$26.90	3.92	$	43,966
Exercisable at June 30, 2014	1,352		$26.05	3.69	$	42,579
Vested and expected to vest at June 30, 2014	1,432		$26.87	3.91	$	43,912

The Company did not grant stock options in the three and six months ended June 30, 2014 and June 30, 2013. Beginning in 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 June 30, 2014 and 2013, was approximately $1.2 million and $5.0 million, respectively. The intrinsic value of options exercised during the six months ended June 30, 2014 and 2013 was approximately $7.0 million and $10.1 million, respectively.

Performance-based Awards ("PSUs")

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. In 2014, the performance metrics of this program are annual targets consisting of net revenue and non-GAAP operating income. 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 six months ended June 30, 2014, the Company granted approximately 83,000 annual performance-based awards. 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 vest 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 2014, it was determined that approximately 83,000 shares of the approximately 100,000 performance-based awards granted in 2013, less forfeitures, vested in aggregate. The 2013 performance metrics consisted of revenue, non-GAAP operating income and strategic goals for such awards. Accordingly, 83,000 performance-based awards were released to the Company's employees and executives in the first quarter of 2014.

A summary of performance-based awards outstanding as of June 30, 2014, and activity during the six 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, 2014	100		$38.48
Granted	83		$53.93
Vested	(83	)	$38.48
Change in units due to performance achievement for PSUs vested in the year	(17	)	$38.48
Forfeited or expired	—		—
Outstanding at June 30, 2014	83		$53.93	0.50	$	4,804
Outstanding and expected to vest at June 30, 2014	48			0.50	$	2,787

The weighted-average grant-date fair value per share of performance-based awards granted in the three and six months ended June 30, 2014, was approximately $48.89 and $53.93, respectively, and awards granted in the three and six months ended June 30, 2013, was approximately $41.78 and $38.62, respectively. The grant-date fair value of awards released, which were fully vested, in the six months ended June 30, 2014 and 2013, was approximately $3.2 million and $2.0 million, respectively. No awards were released in the three months ended June 30, 2014 and 2013.

Long-Term Performance-based Awards ("PRSUs")

In the first quarter of 2014 the Company began granting long-term performance-based awards. The Company's PRSU program provides for the issuance of PRSUs which will vest based on Company performance measured against the 2014 PRSU Plan's established 2016 revenue target. The PRSUs were granted in an amount equal to twice the target number of shares to be issued if the target performance metric is met. The actual number of shares the recipient receives is determined at the end of a three-year performance period based on results achieved versus the Company's performance goal, and may range from zero to 200% of the targeted number. The performance goal for PRSUs granted in fiscal 2014 was based on the Company's adjusted annual revenue growth. Each long-term 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.

Recipients of a PRSU award generally must remain employed by the Company on a continuous basis through the end of the applicable three-year performance period in order to receive shares subject to that award. Expenses associated with these awards, net of estimated forfeitures, are recorded throughout the year depending on the number of shares expected to vest based on progress toward the performance target. The cost of long-term 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.

A summary of long-term performance-based awards outstanding as of June 30, 2014, and activity during the six 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, 2014	—	—
Granted	56	$56.15
Vested	—	—
Forfeited or expired	—	—
Outstanding at June 30, 2014	56	$56.15	2.50	$	3,216
Outstanding and expected to vest at June 30, 2014	49		2.50	$	2,792

The weighted-average grant-date fair value per share of long-term performance-based awards granted in the three and six months ended June 30, 2014, was approximately $47.95 and $56.15, respectively.

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 with the Company over that period. The fair value of 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 expense 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 June 30, 2014, and changes during the six months then ended, are 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, 2014	714		$38.97
Granted	250		$50.97
Vested	(246	)	$38.54
Forfeited or expired	(12	)	$39.99
Outstanding at June 30, 2014	706		$43.35	1.73	$	40,599
Outstanding and expected to vest at June 30, 2014	641			1.67	$	36,860

The weighted-average grant-date fair value per share of RSUs awarded in the three and six months ended June 30, 2014, was approximately $47.81 and $50.97, respectively, and the grant-date fair value per share of RSUs awarded in the three and six months ended June 30, 2013, was approximately $40.80 and $38.28, respectively. The grant-date fair value of RSUs vested in the three and six months ended June 30, 2014, was approximately $7.8 million and $9.5 million, respectively, and the grant-date fair value of RSUs vested in the three and six months ended June 30, 2013, was approximately $6.5 million and $6.8 million, respectively.