3. Stock-Based Compensation

The Company accounts for its stock-based compensation at fair value. The following table summarizes employee stock-based compensation expense by financial statement line item for the three and six months ended September 30, 2010 and 2009 (in thousands):

	Three months ended		Six months ended
	September 30,		September 30,

	2010	2009	2010	2009
	2010	2009	2010	2009
Cost of revenues	$452	$354	$835	$579
Research and development	691	523	1,159	990
Selling, general and administrative	3,183	2,975	5,831	5,349

Total	$4,326	$3,852	$7,825	$6,918

During the six months ended September 30, 2010, the Company granted approximately 219,000 and 324,000 shares of stock options and restricted stock, respectively, to employees under the 2007 Stock Incentive Plan. The restricted stock awards include approximately 86,000 shares of performance-based restricted stock, which will vest upon achievement of certain annual financial and operational performance measurements. The remaining shares granted vest upon the passage of time, generally 3 years. For awards that vest upon the passage of time, expense is being recorded on a straight-line basis over the vesting period. At September 30, 2010, the Company determined that achievement of the performance measures is probable and as such, is recognizing the fair value of the performance-based awards over the estimated performance period of each award.

The total unrecognized compensation cost for unvested employee stock-based compensation awards outstanding, net of estimated forfeitures, was $22.6 million at September 30, 2010. This expense will be recognized over a weighted-average expense period of 2.2 years.

The weighted-average assumptions used in the Black-Scholes valuation model for stock options granted during the three and six months ended September 30, 2010 and 2009 are as follows:

	Three months ended		Six months ended
	September 30,		September 30,
	2010	2009	2010	2009
	2010	2009	2010	2009
Expected volatility	61.5%	66.5%	65.6%	70.2%
Risk-free interest rate	1.6%	2.4%	2.1%	2.6%
Expected life (years)	6.2	4.8	6.2	4.8
Dividend yield	None	None	None	None

The expected volatility was estimated based on an equal weighting of the historical volatility of the Company's common stock and the implied volatility of the Company's traded options. The expected life was estimated based on an analysis of the Company's historical experience of exercise, cancellation, and expiration patterns. The risk-free interest rate is based on the average of the five and seven year U.S. Treasury rates for the three and six months ended September 30, 2010 and the five year U.S. Treasury rates for the three and six months ended September 30, 2009. The stock-based compensation expense recognized in the unaudited condensed consolidated statements of income is based on awards that ultimately are expected to vest; therefore, the amount of expense has been reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures were estimated based on historical experience. This analysis is re-evaluated periodically and the forfeiture rate is adjusted as necessary.