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 nine months ended December 31, 2010 and 2009 (in thousands):


		Three months ended December 31,					Nine months ended December 31,
		2010 (Restated)			2009		2010 (Restated)		2009
Cost of revenues	$	(6	)	$	307	$	828	$	886
Research and development		237			509		1,396		1,499
Selling, general and administrative		2,017			2,706		7,849		8,055
Total	$	2,248		$	3,522	$	10,073	$	10,440

During the nine months ended December 31, 2010, the Company granted approximately 229,000 and 347,000 shares of stock options and restricted stock, respectively, to employees under the 2007 Stock Incentive Plan. The restricted stock awards include approximately 86,500 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 pro rata over 3 years. For awards that vest upon the passage of time, expense is being recorded on a straight-line basis over the vesting period. The Company had previously determined achievement of certain Company performance measures to be probable, and cumulatively recorded $1.2 million in stock-based compensation expense. In connection with the events that led to the restatement described in Note 2, "Restatement," as well as the reduction of revenue, the Company re-assessed the probability of achievement of performance measures and deemed them not probable. Therefore, the Company recorded a restatement adjustment to reduce stockholders' equity and stock-based compensation expenses by $1.2 million for the three and nine months ended December 31, 2010.

The total unrecognized compensation cost for unvested employee stock-based compensation awards outstanding, net of estimated forfeitures, was $19.5 million at December 31, 2010. This expense will be recognized over a weighted-average expense period of 2.0 years.

The weighted-average assumptions used in the Black-Scholes valuation model for stock options granted during the three and nine months ended December 31, 2010 and 2009 are as follows:


	Three months ended December 31,				Nine months ended December 31,
	2010		2009		2010		2009
Expected volatility	61.4	%	65.6	%	65.5	%	68.9	%
Risk-free interest rate	2.4	%	2.6	%	2.1	%	2.6	%
Expected life (years)	6.1		4.8		6.1		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 nine months ended December 31, 2010 and the five year U.S. Treasury rates for the three and nine months ended December 31, 2009. The stock-based compensation expense recognized in the unaudited condensed consolidated statements of operations 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.