8. Employee Benefit Plans

401(k) Plan

We have a defined contribution 401(k) retirement plan (the "401(k) Plan") covering substantially all employees that meet certain age requirements. Employees may contribute up to 90% of their compensation per year (subject to a maximum limit by federal tax law). Under the 401(k) Plan, we may elect to match a discretionary percentage of contributions. No such matching contributions have been made to the 401(k) Plan since its inception.

Employee Stock Purchase Plan

The Employee Stock Purchase Plan ("ESPP") permits our eligible employees to purchase shares of common stock, at semi-annual intervals, through periodic payroll deductions. Payroll deductions may not exceed 10% of the participant's cash compensation subject to certain limitations, and the purchase price will not be less than 85% of the lower of the fair market value of the stock at either the beginning of the applicable "Offering Period" or the Purchase Date. Each Offering Period is 12 months, with new Offering Periods commencing every six months on the dates of February 1 and August 1 of each year. Each Offering Period consists of two (2) six month purchase periods (each a "Purchase Period") during which payroll deductions of the participants are accumulated under the ESPP. The last business day of each Purchase Period is referred to as the "Purchase Date." Purchase Dates are every six months on the dates of January 31 and July 31. Annually in January of each year, subject to Board discretion and certain limitations, shares reserved for the ESPP will automatically be increased by a number of shares equal to 1% of the total number of issued and outstanding shares of our common stock at the preceding year end. On January 30, 2009, July 31, 2009, January 29, 2010, July 30, 2010, January 31, 2011 and July 29, 2011, we issued 84,062, 108,629, 146,500, 60,909, 77,466 and 54,408 respectively, shares of common stock under the ESPP.

Equity Incentive Plans

In 2005, we adopted the 2005 Equity Incentive Plan, as amended (the "2005 Plan"), which replaced the 1999 Incentive Stock Plan and provides for the grant of incentive and nonstatutory stock options, restricted stock, stock bonuses, stock appreciation rights, and restricted stock units to employees, directors or consultants of the Company. Shares reserved include all shares that were available under the 1999 Incentive Stock Plan on the day it was terminated. Options generally vest over four years and expire ten years from the date of grant. In addition, incentive stock options may not be granted at a price less than the 100% of the fair market value on the date of grant. The term of the 2005 Plan is scheduled to end in March 2015. Annually in January of each year, subject to Board discretion and certain limitations, shares reserved for the 2005 Plan will automatically be increased by a number of shares equal to 3% of the total number of issued and outstanding shares of our common stock during the preceding year end.

A summary of our stock option activity, and related information for the year ended December 31, 2011 is as follows (in thousands except weighted-average exercise price and weighted-average remaining contractual term):


	Number of Shares			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (years)		Aggregate Intrinsic Value
Outstanding at December 31, 2010		8,353		$	7.56
Granted		0		$	0
Exercised		(376	)	$	6.02
Cancelled		(160	)	$	9.62

Outstanding at December 31, 2011		7,817		$	7.59		6.3	$	19,039

Exercisable at December 31, 2011		6,513		$	7.65		6.0	$	15,788

The weighted average fair values of options granted was $6.49 and $3.42 for the years ended December 31, 2010, and 2009, respectively. The total intrinsic value of options exercised was $3.0 million, $2.6 million, and $0.1 million determined as of the date of exercise during the years ended December 31, 2011, 2010, and 2009, respectively. The total fair value of options vested was $5.7 million, $6.7 million and $7.7 million for the years ended December 31, 2011, 2010 and 2009, respectively.

The risk-free interest rate assumption is based upon observed interest rates appropriate for the expected life of our employee stock options and stock purchase plan. The dividend yield assumption is based on our history and expectation of dividend payouts.

Due to our limited history as a publicly traded company that began in April 2005, our expected volatility is based on both our historical stock prices and the historical prices of similar companies, as determined by us. Accordingly, we used the simplified method to determine the expected life.

As share-based compensation expense recognized in the consolidated statement of operations for fiscal 2011, 2010 and 2009 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. Authoritative guidance for share-based payment requires forfeitures to be 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.

The following table summarizes information about stock options outstanding at December 31, 2011 (in thousands except for exercise price and contractual life):


Options Outstanding									Options Exercisable
Range of Exercise Price	Number of Shares		Weighted Average Remaining Contractual Life		Weighted Average Exercise Price		Aggregate Intrinsic Value		Number of Shares		Weighted Average Exercise Price		Aggregate Intrinsic Value
$0.50 – $2.40		231		2.6	$	1.67	$	1,766		231	$	1.67	$	1,766
$3.19 – $4.71		1,612		6.9	$	3.50		9,360		1,225	$	3.56		7,048
$5.05 – $8.06		3,323		6.2	$	7.03		7,574		2,953	$	7.06		6,641
$8.26 – $9.21		837		6.0	$	8.91		339		816	$	8.90		333
$9.36 – $25.80		1,814		6.5	$	12.41		0		1,288	$	13.15		0

$0.50 – $25.80		7,817		6.3	$	7.59	$	19,039		6,513	$	7.65	$	15,788

We define in-the-money options at December 31, 2011 as options that had exercise prices that were lower than the $9.31 closing market price of our common stock at that date. The aggregate intrinsic value of options outstanding at December 31, 2011 is calculated as the difference between the exercise price of the underlying options and the market price of our common stock for the 6.0 million options that were in-the-money at that date. There were 5.2 million in-the-money options exercisable at December 31, 2011.

The following table sets forth a summary of our nonvested stock options and activity as of and for the year ended December 31, 2011:


	Shares			Weighted Average Grant Date Fair Value
	(in thousands)
Nonvested at December 31, 2010		2,825		$	4.21
Granted		0			0
Vested		(1,361	)		4.18
Forfeited		(160	)		5.65

Nonvested at December 31, 2011		1,304		$	4.30

Valuation and expense information

The following table summarizes share-based compensation expense related to employee stock options, restricted stock, restricted stock units and employee stock purchases for the years ended December 31, 2011, 2010 and 2009 were allocated as follows (in thousands):


	Years Ended December 31,
	2011		2010		2009
Cost of sales	$	1,438	$	746	$	580
Research and development		4,598		2,695		1,850
Selling, general and administrative		7,477		6,000		5,936

Share-based compensation expense included in operating expenses	$	13,513	$	9,441	$	8,366

We estimated the fair value of each option grant and ESPP purchase rights on the date of grant using the Black-Scholes option pricing model with the below assumptions.

Options:


	Years Ended December 31,
	2011			2010			2009
Risk free interest rate		1.5 – 2.5	%		1.8 –2.8	%		2.0 – 2.8	%
Dividend yield		0	%		0	%		0	%
Expected volatility of the Company's stock		0.68 – 0.69			0.67 –0.68			0.63 – 0.67
Expected life (in years)		6.1			6.1			6.1

ESPP:


	Years Ended December 31,
	2011			2010			2009
Risk free interest rate		0.21 – 0.26	%		0.35 – 0.38	%		0.5 – 1.0	%
Dividend yield		0	%		0	%		0	%
Expected volatility of the Company's stock		0.31 – 0.49			0.32 – 0.45			0.69 – 0.91
Expected life (in years)		1			1			1

Restricted Stock Awards and Restricted Stock Units (RSUs)

We have periodically granted unvested restricted common stock awards to certain employees. As of December 31, 2011, a total of 151,963 such shares had been granted. RSU awards typically vest annually over one to four years. Vesting of all restricted common stock awards and RSUs is subject to continued employment and we have the right to repurchase unvested restricted stock award shares at the original issuance price of $0.001 per share subject to certain terms and conditions. The restricted stock and RSUs had a weighted-average fair value of $12.75 per share at date of grant. The total fair value of RSUs vested was $2.9 million and $0.5 million for the years ended December 31, 2011 and 2010, respectively.

The following table sets forth a summary of our RSU activity as of and for the year ended December 31, 2011 (in thousands except weighted average grant date fair value):


	Shares			Weighted Average Grant Date Fair Value		Aggregate Intrinsic Value
Nonvested at December 31, 2010		499		$	9.94
Granted		1,754			13.99
Vested		(264	)		10.84
Forfeited		(54	)		13.04

Nonvested at December 31, 2011		1,935		$	13.40	$	18,014

Reserved Shares

We have reserved shares of common stock for future issuance as follows (in thousands):


	December 31,
	2011		2010
Stock options and awards under our plans:
Stock options granted and outstanding		7,817		8,353
Unvested RSUs		1,935		499
Reserved for future grant		342		41
Employee Stock Purchase Plan		1,591		1,102

Total		11,685		9,995