STOCK BASED COMPENSATION

Stock Options

We have in effect one stock-based plan under which non-qualified stock options and restricted stock units have been granted to employees and outside directors. Options generally vest over four years and have contractual lives of 10 years.

Under the stock plan, we have 0.6 million shares available for future grant as of September 30, 2012. The 2010 Incentive Plan permits the grant of stock options, stock appreciation rights, stock awards, performance awards, restricted stock and stock units, and other stock and cash-based awards.

As of September 30, 2012, none of our stock-based awards are classified as liabilities. We did not capitalize any stock-based compensation cost.

Compensation cost related to our stock-based compensation plan is as follows:



	September 30,
	2012		2011		2010
	(in thousands)
Cost of revenues	$	567	$	434	$	387
Engineering, research and development	1,530		984		766
Selling, general and administrative	2,345		1,734		1,083
Total stock-based compensation expense	$	4,442	$	3,152	$	2,236

As of September 30, 2012, there was $5.8 million of unrecognized stock-based compensation expense related to non-vested stock options, restricted stock units, and our ESPP. The weighted average period over which the unearned stock-based compensation is expected to be recognized is approximately 2.0 years. An estimated forfeiture rate of 5.2% has been applied to all unvested options and restricted stock outstanding as of September 30, 2012. On a quarterly basis, we assess changes to our estimate of expected equity award forfeitures based on our review of recent forfeiture activity and expected future employee turnover. We recognize the effect of adjustments made to the forfeiture rates, if any, in the period that we change the forfeiture estimate. The effect of forfeiture adjustments in 2012, 2011, and 2010 was not significant. Future stock-based compensation expense and unearned stock-based compensation will increase to the extent that we grant additional equity awards.

The Compensation Committee of the Board of Directors determines the total value of the stock based compensation grants. The exercise price of options is the closing price on the date the options are granted. The options generally vest over four years and expire between five or ten years from the date of grant. The fair value of each option grant is estimated on the date of the grant using the Black‑Scholes option‑pricing model.

Activity in stock option awards is as follows:



	Shares (in thousands)		Weighted average exercise price		Weighted average remaining contractual life (in years)	Aggregate intrinsic value (in thousands)
Options outstanding, September 30, 2009	1,061		$	109.32	4.61	$	2
Granted	575		5.12
Exercised	—
Cancelled or expired	(146	)	280.06
Options outstanding, September 30, 2010	1,490		$	52.40	6.16	$	—
Granted	579		4.30
Exercised	—		—
Cancelled or expired	(370	)	81.02
Options outstanding, September 30, 2011	1,699		$	29.77	6.37	$	—
Granted	401		2.55
Exercised	(6	)	2.54
Cancelled or expired	(281	)	76.87
Options outstanding, September 30, 2012	1,813		16.57		6.61	2
Options exercisable, September 30, 2012	998		$	26.93	5.16	$	—

This intrinsic value represents the excess of the fair market value of our common stock on the date of exercise over the exercise price of such options. The aggregate intrinsic values in the preceding table for the options outstanding represent the total pretax intrinsic value, based on our closing stock price of $2.44, as of September 30, 2012, which would have been received by the option holders had those option holders exercised their in-the-money options as of those dates.

The fair value of stock‑based awards is estimated at the date of grant using the Black‑Scholes option valuation model; however, the value calculated using an option pricing model may not be indicative of the fair value observed in a willing buyer/willing seller market transaction, or actually realized by the employee upon exercise. Expected volatility is based on the historical volatility of our common stock. The risk-free interest rate is based on the United States Treasury constant maturity rate for the expected life of the stock option. The expected life of a stock award is the period of time that the award is expected to be outstanding. Expected lives are estimated in accordance with SEC Staff Accounting Bulletin (“SAB”) No. 107, as amended by SAB No. 110, which provides supplemental application guidance based on the views of the SEC.

The per share fair values of stock options granted in connection with stock incentive plans have been estimated using the following weighted average assumptions:



	September 30,
	2012	2011	2010
Expected life (in years)	6.61	6.17	6.22
Expected volatility:
Weighted-average	86.9%	85.9%	86.4%
Range	82.2% - 87.1%	85.7% - 87.9%	86.2% - 89.1%
Expected dividend	—	—	—
Risk-free interest rate	1.0% - 1.3%	1.1% - 2.8%	1.8% - 2.8%

The weighted average fair value at the date of grant of options granted in fiscal years 2012, 2011 and 2010 was $1.80, $3.16 and $3.80, respectively.

The following table provides additional information in regards to options outstanding as of September 30, 2012:



	Options Outstanding				Options Exercisable
Range of Exercise Price	Number Outstanding (in thousands)	Weighted Average Remaining Contractual Life (Years)	Weighted Average Exercise Price		Number Exercisable (in thousands)	Weighted Average Exercise Price
$2.26 - $2.85	370	9.22	$	2.54	81	$	2.54
3.33 - 4.10	68	8.61	3.46		38	3.51
4.36 - 4.36	365	8.19	4.36		92	4.36
4.60 - 5.14	22	8.07	4.83		13	4.90
5.20 - 174.80	988	4.88	27.51		774	33.66
$2.26 - $174.80	1,813	6.61	$	16.57	998	$	26.93

Restricted Stock Units

We grant restricted stock units to our non-employee directors and to certain employees. Grants vest over varying terms, to a maximum of four years from the date of the grant. Awards to non-employee directors upon their initial appointment or election to the board vest in installments of 33.3% each over the first three anniversaries of the grant date, and annual awards to non-employee directors vest 100% on the first anniversary of the grant date. Unvested restricted shares are forfeited if the recipient's employment terminates for any reason other than death, disability, or special circumstances as determined by the Compensation Committee of the Board of Directors.

Activity for our restricted stock award units is as follows:



	Restricted Stock Units (in thousands)		Weighted Average Grant-Date Fair Value per Share		Weighted average remaining contractual life (in years)	Aggregate intrinsic value (in thousands)
Restricted stock units, September 30, 2009	172		$	7.05	0.66	$	1,272
Awarded	618		5.37
Released	—		—
Forfeited	(19	)	6.24
Restricted stock units, September 30, 2010	771		$	5.72	1.35	$	2,408
Awarded	1,122		4.34
Released	(335	)	5.97
Forfeited	(262	)	4.68
Restricted stock units, September 30, 2011	1,296		$	4.66	1.38	$	3,823
Awarded	1,258		2.57
Released	(721	)	3.99
Forfeited	(147	)	3.48
Restricted stock units, September 30, 2012	1,686		$	3.49	1.09	$	4,113

We issue restricted stock units as part of our equity incentive plans. For the majority of restricted stock units granted, the number of shares issued on the date the restricted stock units vest is net of the minimum statutory withholding requirements that we pay in cash to the appropriate taxing authorities on behalf of our employees. The impact of such withholding totaled $0.6 million as of September 30, 2012 and 2011, respectively and was recorded as settlement on restricted stock tax withholding in the accompanying consolidated statements of stockholders’ deficit. Although shares withheld are not issued, they are treated as common stock repurchases in our consolidated financial statements, as they reduce the number of shares that would have been issued upon vesting.

Employee Stock Purchase Plan

In January 2011, our stockholders approved the 2011 ESPP under which 2.5 million shares of common stock were reserved for issuance. As of September 30, 2012, the 2011 ESPP had 1.7 million shares available for issuance. Approximately 34% of our employees were participating in our stock purchase plan as of September 30, 2012. The first purchase period began on August 1, 2011 and ended January 31, 2012. On January 31, 2012, 0.3 million shares were issued at a price per share of $2.59, a 15.0% discount against the share price on that date. The second purchase period began on February 1, 2012 and ended July 31, 2012. On July 31, 2012, 0.5 million shares were issued at a price per share of $1.79, a 15% discount to the share price on that date. The third purchase period began on August 1, 2012 and ends January 31, 2013.

The fair value of the ESPP awards are calculated in accordance with ASC 718-50, Employee Share Purchase Plans, under which the fair value of each share granted under the ESPP is equal to the sum of 15% of a share of stock, a call option for 85% of a share of stock and a put option for 15% of a share of stock. The fair value of the call and put options are determined using the Black-Scholes pricing model. We used the following range of assumptions for both purchase periods: expected useful life of 0.5 years, weighted average expected volatility of 40.4% to 48.4%, a zero dividend rate, and a risk-free interest rate of 0.09% to 0.2%. We recognized approximately $0.6 million and $0.1 million in ESPP stock compensation for the years ended September 30, 2012 and 2011, respectively.