Note 2. Stock-based Compensation and Stockholders' Equity

Stock Option Plan

In January 2011, the Board of Directors approved an amendment to the 2006 Equity Incentive Plan (the "2006 Plan") that increased by 2,000,000 the aggregate maximum number of shares that may be issued under the 2006 Plan. The amendment to the 2006 Plan was approved by the Company's stockholders in February 2011. The authorized number of shares that may be issued under the 2006 Plan automatically increases on July 1 each year through 2016, by an amount equal to (a) three percent of the number of shares of stock issued and outstanding on the immediately preceding June 30, or (b) a lesser amount determined by the Board of Directors. The exercise price per share for incentive stock options granted to employees owning shares representing more than 10% of the Company at the time of grant cannot be less than 110% of the fair value. Nonqualified stock options and incentive stock options granted to all other persons shall be granted at a price not less than 100% of the fair value. Options generally expire ten years after the date of grant and options vest over four years; 25% at the end of one year and one sixteenth per quarter thereafter. In the three and six months ended December 31, 2011, the Company granted options for the purchase of 778,060 and 1,230,960 shares under the 2006 Plan, respectively. At December 31, 2011, 1,891,151 shares of common stock were available for future grant under the 2006 Plan.

Restricted Stock Awards

Restricted stock awards are share awards that provide the rights to a set number of shares of the Company's stock on the grant date. In August 2008, the Compensation Committee of the Board of Directors of the Company (the "Committee") approved the terms of an agreement (the "Option Exercise Agreement") with Charles Liang, a director and President and Chief Executive Officer of the Company, pursuant to which Mr. Liang exercised a fully vested option previously granted to him for the purchase of 925,000 shares. The option was exercised using a "net-exercise" procedure in which he was issued a number of shares representing the spread between the option exercise price and the then current market value of the shares subject to the option (898,205 shares based upon the market value as of the date of exercise). The shares issued upon exercise of the option are subject to vesting over a five-year vesting period. Vesting of the shares subject to the award may accelerate in certain circumstances pursuant to the terms of the applicable Option Exercise Agreement. The Company determined that there was no incremental fair value of the option exchanged for the award. 538,923 and 359,282 shares were vested as of December 31, 2011 and June 30, 2011, respectively.

Determining Fair Value

Valuation and amortization method — The Company estimates the fair value of stock options granted using the Black-Scholes-option-pricing formula and a single option award approach. This fair value is then amortized ratably over the requisite service periods of the awards, which is generally the vesting period.

Expected Term — The Company's expected term represents the period that the Company's stock-based awards are expected to be outstanding and was determined based on an analysis of the relevant peer companies' post-vest termination rates and the exercise factors for the stock options granted prior to June 30, 2011. For stock options granted after June 30, 2011, expected term is based on a combination of the Company's peer group and the Company's historical experience.

Expected Volatility — Expected volatility is based on a combination of the implied and historical volatility for its peer group and the Company's historical volatility for the stock options granted prior to September 30, 2009. For stock options granted after September 30, 2009, expected volatility is based solely on the Company's historical volatility.

Expected Dividend — The Black-Scholes valuation model calls for a single expected dividend yield as an input and the Company has no plans to pay dividends.

Risk-Free Interest Rate — The risk-free interest rate used in the Black-Scholes valuation model is based on the U.S. Treasury zero coupon issues in effect at the time of grant for periods corresponding with the expected term of the option.

Estimated Forfeitures — The estimated forfeiture rate is based on the Company's historical forfeiture rates and the estimate is revised in subsequent periods if actual forfeitures differ from the estimate.

The fair value of stock option grants for the three and six months ended December 31, 2011 and 2010 was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:


	Three Months Ended December 31,		Six Months Ended December 31,
	2011	2010	2011	2010
Risk-free interest rate	1.10%	1.01%	1.10% - 1.32%	1.01% - 1.40%
Expected life	5.02 years	4.42 years	5.01 - 5.02 years	4.38 - 4.42 years
Dividend yield	0%	0%	0%	0%
Volatility	53.11%	57.02%	53.11% - 53.72%	54.50% - 57.02%
Weighted-average fair value	$ 7.05	$ 4.95	$ 6.82	$ 5.51

The following table shows total stock-based compensation expense included in the condensed consolidated statements of operations for the three and six months ended December 31, 2011 and 2010 (in thousands).


	Three Months Ended December 31,						Six Months Ended December 31,
	2011			2010			2011			2010
Cost of sales	$	200		$	173		$	408		$	367
Research and development		1,328			928			2,600			1,792
Sales and marketing		362			249			640			531
General and administrative		617			480			1,189			964

Stock-based compensation expense before taxes		2,507			1,830			4,837			3,654
Income tax impact		(307	)		(175	)		(538	)		(366	)

Stock-based compensation expense, net	$	2,200		$	1,655		$	4,299		$	3,288

The cash flows resulting from the tax benefits for tax deductions resulting from the exercise of stock options in excess of the compensation expense recorded for those options (excess tax benefits) issued or modified since July 1, 2006 are classified as cash from financing activities. Excess tax benefits for stock options issued prior to July 1, 2006 are classified as cash from operating activities. The Company had $1,205,000 and $1,874,000 of excess tax benefits accounted for in the Company's additional paid-in capital in the six months ended December 31, 2011 and 2010, respectively. The Company had excess tax benefits that are classified as cash from financing activities of $1,084,000 and $1,216,000 in the six months ended December 31, 2011 and 2010, respectively, for options issued since July 1, 2006. Excess tax benefits for stock options issued prior to July 1, 2006 continue to be classified as cash from operating activities.

Stock Option and Awards Activity

The following table summarizes stock option activity during the six months ended December 31, 2011 under all stock option plans:


	Number of Shares			Weighted Average Exercise Price Per Share		Weighted- Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value (in thousands)
Outstanding at July 1, 2011		10,480,785		$	8.86		6.77	$	78,146
Granted		1,230,960			14.65
Exercised		(274,877	)		7.01
Forfeited or cancelled		(186,747	)		13.92

Outstanding at December 31, 2011		11,250,121			9.46		6.61		72,638
Vested and expected to vest at December 31, 2011		10,763,498			9.30		6.51		68,626
Exercisable at December 31, 2011		7,313,042			7.61		5.47		59,710

The total pretax intrinsic value of options exercised was $1,709,000 and $2,134,000 for the three and six months ended December 31, 2011, respectively, and $1,291,000 and $3,492,000 for the three and six months ended December 31, 2010, respectively. As of December 31, 2011, the Company's total unrecognized compensation cost related to non-vested stock-based awards granted since July 1, 2006 to employees and non-employee directors was approximately $20,765,000, which will be recognized over a weighted-average vesting period of approximately 2.44 years.

The following table summarizes the Company's restricted stock award activity for the six months ended December 31, 2011:


	Restricted Stock Awards
	Number of Shares			Weighted Average Grant Date Fair Value Per Share
Nonvested stock at July 1, 2011		538,923		$	10.66
Granted		—			—
Vested		(179,641	)		10.66
Forfeited		—			—

Nonvested stock at December 31, 2011		359,282			10.66

The total pretax intrinsic value of restricted stock awards vested was $2,375,000 for both three and six months ended December 31, 2011 and $718,000 and $2,633,000 for the three and six months ended December 31, 2010, respectively. In the six months ended December 31, 2011 and 2010, upon vesting, 179,641 and 316,600 shares of restricted stock awards were net share-settled such that the Company withheld 83,857 and 147,977 shares with value equivalent to two officers' and an employee's minimum statutory obligation for the applicable income and other employment taxes, and remitted the cash to the appropriate taxing authorities, respectively. The total shares withheld were based on the value of the restricted stock awards on their vesting date as determined by the Company's closing stock price. Total payments for the two officers' and an employee's tax obligations to the taxing authorities were $1,109,000 and $1,434,000 for the six months ended December 31, 2011 and 2010, respectively, and are reflected as a financing activity within the Condensed Consolidated Statements of Cash Flows. These net-share settlements had the effect of share repurchases by the Company as they reduced and retired the number of shares that would have otherwise been issued as a result of the vesting and did not represent an expense to the Company.

The total intrinsic value of the outstanding restricted stock awards was $5,634,000 and $8,671,000 as of December 31, 2011 and June 30, 2011, respectively. There is no incremental fair value to be recognized as compensation expense in connection with the unvested restricted stock awards of 359,282 shares as of December 31, 2011.